Lots to digest with eRoad this monring.
FY22 Q1 Update
Starting with the quarterly results for the 3 months to June 30, eRoad reported a 3.3% lift in contracted units from the preceeding quarter. Asset retention remained strong at >95%.
Australia was the clear standout, with unit growth of 31% from the March quarter (albeit off a low base, AU represents just 3% of all contracted units). Really good to see.
NZ, the largest segment by far, grew units by around 3%, while the US was pretty much flat -- quite disappointing. The company said it had a couple of enterprise prospects in trial phase which represents 1,500 units (about 4% of the current installed base in America), with a number of mid-tier pilots also underway.
Unfortunately, a good part of these (if converted) will be offset by the upcoming loss of a US enterprise customer which currently has 1700 units. The reason being they were acquired by another company and will be aligning their tech with that of their acquirer.
The Clarity Dashcam product -- launched in October last year -- has seen strong growth,growing from ~1000 units to ~3000 units over the quarter. That's encouraging.
On a stand alone basis, the previous guidance for FY22 remains unchanged. That is, 13% top line growth.
BUT, the other big bit of news is the acquisition of Coretex...
Coretex Acquisition
Coretex is a "telematics vertical specialist provider" also founded in New Zealand (basically, they do a range of vehicle tech solutions, ranging from telematics for cement trucks, cold storage transport, watse collection vehicles as well as the same sort of offering as eRoad for general fleet management. You can learn more on their website here).
They also operate in NZ, Australia and the US, and have a total of 64,000 units (about half of what eRoad presently has). The company is expected to deliver NZ$50-53m in Annualised Monthly Recurring Revenue (AMRR) in FY22, up from NZ$42.7 in FY21 (~20% growth) which compares to NZ$88.4m for eRoad in FY21.
Acclerates eRoads growth by 2 years, expanding into new verticles, expanding customer base and boosting tech development. The biggest gains will be seen in the Australian and US segments, which will see revenue boosted by 6x and 2x respectively. After the transaction, eRoad's US customer base will grow from 28% to 43% of the total, with Australia going from 2% to 6%.
The proposed transaction will cost NZ$127.7m and a further NZ$30.6m if certain performance hurdles are met. At current FX rates, that converts to AUD$148m, or about 31% of eRoad's market cap.
This will be funded by the issue of NZ$96m worth of new shares to Coretex at NZ$6 each (compared to last closing price of AUD$5.78), NZ$64.4m institution raise at NZ$5.58, NZ$16m as a share purchase plan for existing shareholders, with the rest from existing cash balance.
Really great to see very small discount to the market price (only around 7% at current FX rates for the insto raise, and no discount for the share issue to Coretex).
The price doesnt seem too onerous, assuming synergies can be realised and growth maintained. Assuming the conditional component is paid out, you're looking at a total cost of NZ$188.3m, which represents a 3.7x EV/AMRR multiple, or a 11.7x EBITDA multiple, or 4x revenue -- not terrible given the expected 20%-odd growth in AMRR for Coretex, as well as touted integration benefits. Still, revenue growth has been about 10%, and a big lift in R&D and covid related impacts do suggest lower levels of growth between FY20 and FY22
Summary
This is a big acquisition, and will certainly take time to properly digest. It wont be until FY23 that they expect to see an accretive impact to earnings. If growth stalls, the price paid will be seen as rather expensive.
The US is a huge market, but growth has taken a real knock from covid -- far more than the other segments. If growth doesnt return, and soon, it'll be a big blow to the investment thesis.
At the same time, this is a sector that is expected to grow significantly in the years ahead and the combined entity appears to have great products, good penetration and (exlcuding recent US performance, which is ostensibly covid related) good sales momentum. The economics are also attractive, and customer lock-in is meaningful. Both companies appear to be led by capable, experienced and aligned people and both have been investing heavily in new products and growth.
I remain bullish and am a happy shareholder. But will be keen to see the realisation of integration benefits and a return to growth in the US.
You can read the investor presentation here