Smart Parking yesterday held their AGM and gave a comprehensive trading update (they're also meeting with us on Monday). There was a lot to like. It's a seasonal business and Q1 is usually a good quarter but comps to pcp are relevant and these all looked good. Fines were up 26% versus pcp and up 15% in the mature/not-really-mature UK business. Record revenue. Looks to be gaining operating leverage, although admittedly that is relying on an unaudited adjusted EBITDA number.
Site growth wasn't as rapid as previous quarters but look to have reaccelerated over the past 5-6 weeks to stand at 1193 sites. Even using the quarter end number site growth was 29% higher than pcp and 16% higher in the UK. They brought forward their 1500 site target by 6 months to 31 December 2024 and in so doing continued their happy habit of beating what initially look like aspirational site targets. Importantly the site target is based on organic growth only and so is likely now a conservative target.
When I've spoken to them in the past they think at 1500 sites they're a $70-75 million revenue company, generating $22-25 million EBITDA. That seems about right at the topline, although I'm not modelling quite so much to fall to EBITDA and hoping to get a pleasant surprise. But 1500 sites is just the start. When you consider there are 140,000 sites just in the territories they operate in, you start to get an idea of how long the runway is.
They spoke at length about wanting to move into new territories. I like the way they go about this. They prepare the ground by mentioning it to shareholders without a lot of detail. Six to 12 months later they're getting more specific about where they're focus is (Europe and the US). They talk about not biting off more than they can chew and just moving into one territory at a time. They talk about learning from the Queensland sojourn and focusing on territories that not only allow third party access to licensing information, but also have a code of practice or similar legislation in place. All good things in my view.
The negatives? They're all regulatory. It doesn't sound like there has been much movement on the Queensland side of things. That's not all that surprising given how negatively the government came out against the industry. Their best bet may be a change of government next year, which the polls suggest is likely. In the UK the government is considering submissions to its proposed new legislation and is not expected to give its verdict for at least six months. On the plus side that means a longer period of status quo, but on the downside the dark clouds loom for longer.
There's a good-ish argument that a microcap that has been a microcap for many years will always stay a microcap. I've said similar things in the past, particularly when you have the same people in charge. There's also an argument that change doesn't happen overnight and takes longer and will be harder than you first envisage. Smart Parking is evidence for the latter argument. Current CEO Paul Gillespie took the reigns in FY13 when revenue was $20.6 million. In FY21 revenue was...$20.6 million*. Roll forward two years to FY23 and revenue was $45.2 million and the momentum appears to be continuing. It's not vain growth either - they're increasingly profitable and cash generating. Sometimes it just takes time to get things humming.
[Held]
*admittedly COVID impacted but let's not the truth get in the way of a good story
Just got back from a Mauritian beach yesterday and catching up on a few updates and the like. Smart Parking delivered not the worst update of the pack. For these guys it's all about sites under management - what they call "the estate". Sites are up 13% on the previous quarter to 1043 (up 24% YoY) and they remain on track for their 1500 site target by the end of FY25. I imagine we'll see a new target in the next 12 months for FY27 or FY28.
Currency is a headwind given they make most of their money in the UK, but their cost base is largely overseas too so forms a natural hedge. They present an Adjusted EBITDA number, which excludes Germany's setup costs. I imagine this irits some people but they are transparent about the amount they're excluding and it is useful to know what the German investment is so I'm ok with it on balance. For what it's worth Adjusted EBITDA is $8.5m Q3 YTD ($8.9m in constant currency). This excludes $1.2m of Germany's costs. EBITDA grew slower in Q3 but it's traditionally a quieter period, with the current quarter being the bigger maker of bank.
On a regional front the UK is still the engine room and despite being the most mature region it is still growing at a decent clip organically. APAC (really just NZ) appears to continue to be growing rapidly (and profitably) despite the loss of new sales in Queensland. Germany is growing quickly off a low base but not at the speed they had hoped, resulting in some sales team remediation. It's a slightly mixed message as they have also suggested the rampup has been similar to New Zealand at the same stage. Germany remains on watch with the sales intervention hopefully gaining traction in Q4.
Cash on hand is down a little but Q3 is the quietest quarter and it's difficult to make conclusions without knowing how working capital and debt have moved. Overall the thesis remains intact and a key question will be what they do with what I expect will be a growing cash pile. Any dividends they pay would be unfranked so more aggressive buybacks and/or M&A appear to be the more likely options. Not a bad problem to have.
[Held]
Overall it was a solid update from Smart Parking last week with strong topline growth and decent cash generation being partly offset by unfavourable FX movements and increased overheads.
The key driver of the results is, as always, sites under management and on this measure they continue to deliver. The Group held 984 sites at the reporting date, which was up from 839 sites six months prior. They were keen to highlight that they've since exceeded 1000 sites, although you could argue QLD sites should be backed out of that number. Although the 1000 site target has been replaced by a 1500 site by June 2025 target, longer term holders will remember that 1000 sites by June 2023 was an earlier target and it deserves mention that they have beaten this. On the earnings call they reaffirmed the 1500 site target and I asked them to clarify if that meant ex-QLD, which they confirmed was the case.
Revenue was up 18% vs pcp, but up 25% from a constant currency perspective. UK growth is impressive given its relative maturity but the real driver is APAC, half of which we now know is - at best - on pause. Germany doesn't yet make a material contribution and will be on watch going forwards to ensure it does do so.
At the same time operating expenses appear to have jumped significantly and permanently. They strike me as a little sensitive about the investment in Germany relative to the return they're getting and I'm not fully on board with their practice of backing out Germany's costs from Adjusted EBITDA. However, it's all fairly transparent so you can rework it as you see fit. Overall a reasonable level of explanation was given to the cost uplift but going forwards I'd like to see that increasing at a lower rate. I have asked for clarification about what the disclosed monthly exit opex rate of $1.7m includes as it's not entirely clear, but that equates to a six month number of $10.2m - not too much higher than the disclosed half yearly opex cost, suggesting that opex growth may have slowed.
Free cash flow was strong but again it should be noted they are excluding Germany's costs from their definition of this. It's all very transparent though so choose your own adventure on what you do there. It also doesn't include Growth Capex (almost all of their capex isn't ongoing). I'm ok with that, others won't be. The balance sheet continues to look good and they have flagged a continuation of their share buyback (which they announced to the market they had started acting on a few days later). They've also started talking about dividends. I assume they will be unfranked given their overseas operations so I don't much see the point of that unless they've completely run out of ideas, but it is another indication that they do seem to act in alignment with shareholders.
Kudos for them holding an investor briefing. One of the themes I felt this reporting season has delivered is somewhat less of those and credit goes out to management who front up when the news isn't necessarily all good. Based on the attendees they do seem to be getting a little more insto coverage, although some of the questions seem to suggest the analysts hadn't had alot of exposure to the business yet.
In summary
The good:
- Site growth is the key driver and is tracking nicely. I haven't even mentioned the Technology segment of the business here as it's become an increasingly immaterial part of the business.
- As expected Revenue growth is following sites under management. Previously the CFO has said they could deliver $70-75m at the topline with 1500 sites. My model also supports this, albeit at the bottom end of that range. At that kind of number and given their propensity to gush cash, they'll be hard for the market to miss.
The not so good:
- Germany isn't yet shooting the lights out but it's early days. @Wini highlighted an Aldi win they'd had in this market some time back and they disclosed they now manage two Aldi stores, in deals signed off at the northern Germany region head office. According to Wikipedia Aldi Nord is the bigger of the two Aldi regions and has 2298 stores.
- I think the market was a bit disappointed to see the Cost base jump as it did. It's fair to say I was a bit too and this is on watch going forwards.
The ugly
- I think the prudent thing to assume is Queensland is not coming back and be pleasantly surprised if it does. I asked management on the investor call what learnings they took from this and someone asked something similar on the Strawman call. Both times they highlighted the lack of a Code of Practice in Queensland that does exist in other markets they operate in and that this would prevent a recurrence. I think the fact they were blindsided like they were suggests they and the peak body didn't do nearly enough work with the government to advocate/educate/put a code in place etc. and being proactive should be a key learning.
Overall I'm still happy to hold. I took a little profit at higher levels but it's still a larger holding and I think closer to a buy than a sell given it's pulled back a bit and should be supported by the share buyback if that continues.
Coming so soon after a trading update, SPZ's AGM was held this morning without a great deal of fanfare or controversy. A couple of new updates were given though. Smart Parking held 930 sites under management as at 31 Oct. That's up from 839 from 30 Jun and puts them on track to meet and beat their target of 1500 sites by Jun 2025. To add some context to that, according to them there are 150,000 sites available in markets they currently operate in - so their target is to manage 1% of those sites.
It also appeared that cash had rebounded in October and management included a waterfall to show movement of cash in the first four months of this year. They also forecast capex spend to be $4.5-5.5m in FY23. The nice thing about that spend is that it immediately starts paying for itself; it's not building capacity that you then have to go out and try to get someone to pay for.
A couple of other notes from the meeting:
- About 20 sites from the NE Parking acquisition (517 manual sites) have been converted to ANPR. Even they acknowledge it's not going as quickly as they would like but they don't need much more than that to justify the acquisition. I don't think of NE Parking as an acquisition per se - it's more like they paid a nominal sum to add a lot of sites to their pipeline and it may be a couple of years before they exhaust the pipeline.
- They're not yet seeing more challenging economic conditions being reflected in either traffic volumes or delinquency rates. In fact, October was a record receipts month for the U.K.
[Held]
Snap @Rocket6 you just beat me to it
***
Busy day...start of a busy week...
Smart Parking's result this morning was better than I expected on most measures. Revenue was up 68% on FY21, mainly in the parking services business (i.e. fines) due to a 36% increase in sites under management and considerably higher yield per site. Adjusted EBITDA was $8.8m in FY22, compared to $2.2m in FY21 despite considerable investments and additional headcount for future growth and normalisation of other opex items which benefitted from COVID in the prior year. Adjusted NPAT went from a loss of $1.7m in FY21 to a profit of $2.2m I normally don't like to see an Adjusted NPAT but given the $6.9m one-off VAT win the company had over the HMRC in FY21 I think it does make sense in this case.
The company claims a free cash flow of $8.1m but they do exclude capex from this (but do include lease payments) on the basis that they classify this all of this as growth. Given the nature of their business I think it probably makes sense that they wouldn't incur maintenance capex and I can accept their reasoning (Claude is shaking his fist at the monitor right now) but if you don't just add it back - I think the valuation stacks up even if you do.
Some notes from the call and releases this morning:
- Sites under management (being a key metric) are scaling up nicely and on track for previous target of 1000 by end of FY23 and new target of 1500 by end of FY25
- New markets:
- NZ - 20 sites, EBITDA and cashflow positive. Target of 75 by June 2023. 3000 potential sites.
- QLD - 27 sites. Target of 80 by June 2023. 2000 potential sites.
- Germany - foothold of 4 sites. Target of 70 by June 2023. Dunno how many potential sites, lots - possibly twice that of the UK, which has 45,000 potential sites.
- Share buyback to continue while share price remains depressed
- Overheads grew substantially but management have indicated this was due to some investments for growth (e.g. Germany) and end of furlough schemes etc. and shouldn't grow at the same rate going forwards
- Acquisitions are performing at (NE Parking) or ahead (Enterprise) of targets
- Technology segment was EBITDA positive. This was a bit of a surprise to me. In previous conversations management's commentary wasn't that bullish in relation to that business.
- July and August to date have been record months
- Regulatory overhead of Parking Code of Practice is still on hold and government hasn't provided update (they've understandably been busy giving Boris the arse). Interestingly Paul stated Smart Parking and the majority of the industry would like to see most of the code implemented - just not the bits that cap their fines.
- Are seeking more acquisitions or markets. They are limited to juristictions that allow number plate owner databases to be accessed, which is why QLD is the only state in Australia they have thus far entered.
So overall very positive. I mentioned to someone this morning that there are some things I don't love. In particular I think they could do a better job of presenting the statutory accounts to be somewhat more aligned to the management accounts. I get they serve different purposes but GAAPs aren't completely prescriptive and other companies manage that better than they do.
I also don't love the word Adjusted in front of EBITDA and NPAT but I've always found them pretty transparent about what has been adjusted and you can backwork it if you want to. Those are relatively minor quibbles compared to keeping the business on track and delivering on the promises they've been making, which so far they seem to be doing.
Held here and IRL
Highlights
- Revenue 38.1m, an increase of 68%
- Total sites under management: 839 – an increase of 36%
- Parking breach notices increased by 81%, largely due to increased sites under management and recovery from Covid restrictions.
- Cash holdings 10.8m
- Inflow from operating activities – 10.1m, an increase on last year’s 7m.
- Free cash flow of 8.1m, an increase of 624%
- FY22 was profitable for the business, with NPAT coming in just under 1m. This is a decrease on last year due to a one-off VAT payment, which bolstered FY21 earnings.
I still need to do a more thorough deep dive on this one, but it looks to have been another impressive year for one my highest conviction holdings. Management has done remarkably well in managing the business during a tough period. While many parking operators struggle, Smart Parking is now a stronger, more resilient business than it was 24 months ago.
We are also starting to see some scaling take place. Essentially we have seen revenue increase by around 16m, while other costs (excluding D&A) increased by around 3.5m:
- Materials/consumables: increase of 500k
- Employee expense: increase of 2.7m
- Depreciation/amortisation: increase of 900k
- Rental/lease costs: Increase of 170k
The business doesn’t shy away from increasing overheads either, noting a ‘51% increase’ in their investor presentation. But with a gross margin of 60%> and the business seemingly using its cash well, I worry very little about an increase in costs when revenue is outpacing that increase by more than 4x.
When you consider they are trying to break into new markets in Germany, Australia, and New Zealand, the costs look even more impressive. And pleasingly, they are funding this growth themselves without having to tap shareholders on the shoulder. And for an added bonus, New Zealand is already operating cash flow positive despite only recently entering this market.
In short, this is a capital light business that requires minimal maintenance CapEx to fund operating activities. This is starting to reflect in their financials. My confidence continues to grow as a result. I will update my valuation in the coming weeks.
FY23 outlook
- The business provided an update re: early FY23 activity, with 878 sites as of 22 August.
- They have also set some targets: 80 Australian sites, 75 NZ sites and 70 German sites by June 2023.
- They believe the current market in Germany is very manual/employee orientated. SPZ's tech-led solutions should provide them with a competitive advantage in this market, and result in additional client wins.
- Scope for further accretive acquisitions -- which seems pragmatic given their strong balance sheet and history of sensible acquisitions.
- They expect further profitable growth in the coming FY.
Smart Parking this morning announced they were acquiring a business that operates 517 sites for $0.52m (effectively $1k/site). I'm trying to get my head around this. Sites under management is their key metric and this is a huge chunk at a very low acquisition cost. It is a 70% increase on their sites under management reported as at 31 Dec 21, it smashes their end of FY23 target of having 1000 sites under management and puts them on track to hit their FY25 target of 1500 managed sites two years early.
On the other hand there is no other financials provided in the release and given the price paid you would have to imagine they are being operated at a very low or no margin. These are all manual sites, which is a different business model to the Automated Number Plate Recognition (ANPR) technology that they operate. The opportunity for them is to convert them to ANPR and you would think they will be able to do this given their business model is to fund the installation of payment machines and cameras themselves and then recover the costs of doing so from the resulting efficiency gains in charging parking fines. The payback period is 5-7 months.
I met with management a couple of months ago and plan to do a bit of a write up on them after they release a quarterly update where I will also include risks but briefly they include:
- structurally reduced use of cars/parking following COVID
- UK parking legislation, which would cap their parking fine amounts at a lower level than they currently charge
- existential threat of self driving cars making paid parking redundant
[Held]
Just doing some due diligence post-half year reporting and came across this disclosure about an acquisition SPZ had then recently bought (the disclosure was in 2012 for an acquisition made in 2011). I'm not sure I've seen a more brutally honest summary of some of the issues facing the business - if you've seen a better one let me know! They couldn't even fit it all on one slide (the third dot point on the second page is particularly funny/scary):
Fortunately SPZ has come a long way in the past couple of years under new management. There are risks that I want to look into and write up over the next few weeks but overall I see this as a business that finally has clear short and medium term targets, is on target to deliver on those and will eventually get rewarded for that with a re-rate.
[Held]
Smart Parking released half year results this morning above guidance for both revenue and EBITDA.
This is now a consistently profitable company and cashflow positive company with increasingly bright prospects as it moves into new markets (Australia, NZ and Germany) and continues to broaden its offering. About the only thing that could be seen as a negative was the fact net operating sites (a key metric for them) fell by one in the quarter to 737. However, this was explained on the call as a combination of their decision to rationalise underperforming sites as well as the loss of one customer with multiple sites and was further allayed by the fact they disclosed sites under management had grown to 772 as at 18 Feb.
Some other highlights and thoughts from the call:
- margins have expanded to over 90% and they see the prospect for this to grow further (doesn't quite square with the fact they have flagged an influx of lower margin technology revenue in the second half)
- Starting to get traction in NZ and Australia with NZ EBITDA positive in 1H and Aust expected to be EBITDA positive in 2H
- Flagged confirmed order book of $4.8m for technology sales, most of which will be delivered in 2H (compared to only $0.3m in 1H). Gatwick Airport represents $1.3m of this number and the timing of recognition of this is currently uncertain.
- Expecting an increase in opex in 2H to support rollout into new markets.
- Long discussed new U.K. parking legislation has finally been tabled. Among other things this legislation will cap/standardise the parking fine amounts that can be charged in different locations and situations. This is a major and high-margin revenue source for the company. Overall the company mostly views the changes as positive, although they're still need to get some clarification of the interpretation of some of the legislation. I tried to get some more clarity around the financial impact of these changes but they weren't giving up their modelling at least until they got more clarity around those interpretations.
- The legislation increase compliance costs across the industry. By itself that's not great news but management believes it's a net positive as it will impact smaller operators most and will drive consolidation in the industry.
- Targeting 200 new organic sites annually (already had targets of 1000 sites by Jun 2023 and 1500 by Jun 2025).
- SPZ acquisition was completed in Aug 2021 for $1.5m and contributed $850k of revenue in its first 4 months of ownership.
- Q2 revenue actually exceeded Q1, despite being a traditionally quieter quarter. I wouldn't be surprised to see this slow somewhat in Q3 before beginning to grow again in Q4.
So overall a very good result. This is a business which is much de-risked from when @Rocket6 first starting writing about them but hasn't caught any love from Mr Market just yet, who may want to see what the impact of the new UK legislation (to be implemented on 31 Dec 2023) is going to be. With the already booked tech sales I think they could deliver revenue of $38-40m this year and earnings of $5-6m. I'm a big fan.
[Held]