18-Nov-2024: Canaccord Genuity: Raising SPZ Target Price to $1.10/share (prev. $0.75/share)

Source: https://canaccordgenuity.bluematrix.com/sellside/EmailDocViewer?encrypt=f277778a-b556-4617-9adc-dcf160310b70&mime=pdf&co=Canaccordgenuity&[email protected]&source=mail

That was page 1 of that CG broker report - click on the link at the top (or copy and paste that plain text link above) to access the full report.

[not held]

This is a solid director buy, though I'm a bit puzzled as to why he's buying at 90c!

I just noticed this line someone had posted I think from the annual report. Maybe trying to strengthen a negotiating position? I don't really know if that kind of thing is done.

As already mentioned, we got a glimpse into Q1 FY25 and not surprisingly Smart Parking continues to kick goals. My thesis is that Smart Parking will be able to increase revenue YoY (like it has done since 2021), with a target of more than 15-20%, while getting an attractive return on capital employed. How? They invest their cash well and their business model is bloody attractive. In terms of a thesis check, things are going well here.

Historical data

I have been monitoring their progress over several years and I figured this was worth sharing. Since 2021, growth has been steady (arguably the best way to grow). I think this business will continue to flourish into the future with the exception of any major hiccups, mainly regulatory ones, along the way. Management's new target (3000 sites) in four years speaks to their confidence also. Should they continue on this current growth trajectory, they should achieve market-beating returns and then some.

What I am looking to see over the next few years is UK sites, as a % of total sites under management, decreasing -- suggesting they are growing in other jurisdictions but also helping to reduce key market risk in the UK.

Another risk worth highlighting relates to the current management team, specifically the CEO/MD and CFO. The current CEO and MD, Paul Gillespie, has been employed since 2013, while the current CFO, Richard Ludbrook, has been there nearly 14 years. Further, the current Chair, Christopher Morris, has been in his position since 2009. Under their direction, more recently in particular, Smart Parking has thrived. That said, there is no guarantee the business performs continues to perform this well under new management. Something to monitor.

Disc. held

$SPZ held their AGM this morning.

A few positive updates, with the two key slides added below:

• 1Q FY25 is off to a good start: revenue up 24% and Adjusted EBITDA up 30%, both to PCP
• The 1500 site YE target has been achieved ahead of plan (1529 at 15 Nov) - note this targt had been accelerated from EOFY25
• A new long term target to achieve 3000 organic sites, doubling the business, by December 2028

CEO Paul noted that it's taken them 10 years to get to 1500 sites, and they now aim to add the next 1500 in 4 years.

Work on new markets in Scandinavia and the US (Texas, Florida) is progressing. Focus is now on finding the right entry point.

Demark is off to the races with contracts being signed.

UK - single industry code of practice agreed, no issues flagged under the Labour Government - regualtory environment appears stable for now. Paul thinks the Government will now monitor and see how the industry functions under the unified code.

Churn remains low at 30-40 site p.a.: mix of site redevelopments, exits initiated by $SPZ, and some losses to competitors.

Conversations under way with the new QLD LNP Government - warm but non-specific noises. Expecting movement in the New Year. Paul said he is confident they will return.

Overall, this is a company that is continuing to deliver, with a management who appear confident across all markets, with a clear focus on both operational delivery and growth.

On Valuation:

Market likes today's update. With SP at time of writing at $0.82, getting towards the upper end of my valuation. So, at 3.8% in RL, I'm a hold here. Need to update valuation in the light of the 3000-Dec. 2028 growth target.

Disc: Held in Rl and SM

Welcome as it is I find a 14% jump in SP on no news in weeks a bit disconcerting… is this just a case of small volumes? (900,000 shares traded) or is an institution building a position? Or something else entirely?

I have been thinking about taking a position in Smart Parking for the last couple of months. I think among private investors looking to beat the market via small cap stocks it has been a bit of a darling in 2024. The management seem reasoanble and its financials are pretty solid. I found the presentations on Strawman quite insightful in this regard.

But there was just something that was gnawing at the back of my mind about this company and why I couldn't pull the trigger on it. This will sound absurd, but I think my reservations about this company are that I just philosophically don't like the business model, it is essentially collecting fines for various companies. And I understand the other side to that equation, for society to function car spots have to be available. Imposing restrictions and fines on people is about as strong an incentive as it gets to have people move their parked car. But I couldn't shake the inherent prejudice (or bias whichever way you want to look at it) I had for the underlying philosophy of the business. Maybe it's because I'm the kind of guy that (irrationally) likes to drive around for additional 5 minutes in order to avoid paying for parking in the first place, I don't know.

But then I had another thought.

I am not a professional investor. I am private individual that invests the majority of my real life funds in index funds. To the extent I am investing in individual stocks, and small caps at that, I am really playing a much riskier game. And in order for the risks I take to be worth it, the pay-off has to be significant. And as my Dad used to say, "the only rich guy I ever knew told me one thing, you get rich slowly, son". And so the time horizon for those significant profits to materalise is going to be decades. When you broaden out your time horizon, the financials of the business are important. The daily charts have a place, I am not knocking technical analysis or even short-term fundamental analysis. But implicit in your investment is an overall thesis about where society and the particular sector you are investing into is going. This is why I have come to believe that investing requires a large degree of humility to admit that luck plays a significant role as nobody can predict the future.

And as Lenin said, "there are decades where nothin happens and week where decades happen". And so the question I have about this business, particularly if it's based in UK cities, is whether the use of carparks is going to increase overtime. I have been (and remain to be fair) very sceptical about the driverless car movement. But in recent weeks, you'd have to have been living under a rock to not see the prevalance of these things increasing. My instagram feed is full of people I know test driving these cars in the US etc. And while I will support arguments about people always wanting to own their own car, their specific car and needing to park etc. I do feel investing in something as simple as car par collection fees for the long-term is asking for trouble. That's not to say people won't see decent capital returns in the next 2-5 years potentially and so if that's your time horizon, who am I to stop you. But if you are more of the 'coffee can', 20+ year time horizon investor, I would question whether this business is for you.

For those reasons I've held off investing even though the fundamentals and the short-term looks to be pretty positive.

@mikebrisy @Noddy74 @GazD some good thoughts already. My take: FY24 was yet another good year. Money where my mouth is: this company is by far my largest holding in my satellite portfolio (reflected on Strawman too – although my RL weighting is slightly higher). Are you insane, you ask? A weighting of 20%?! Perhaps, but my knowledge and conviction has continued to grow over a number of years, and in that time I have grown to appreciate management and their growth strategy. I have also become more comfortable with a significant weighting. That doesn't mean there aren't risks; there are several. But their journey reminds me somewhat of Codan – management recognised their reliance on the UK market (in Codan’s case, their detector biz) and in response moved to diversify operations to other markets. But they are doing this in a measured way and are choosing markets where the risks (as seen in the UK and AU) are much reduced. This theme continued in FY24 – UK obviously remains a massive part of their business (78% of total sites) but this is a reduction on last year’s 84% – and that’s with the Qld market currently paused! I forecast further reductions to this figure in FY25 as the business continues to grow in other markets.

Main highlights:

• Revenue up 21% YoY
• Total sites increased 28%, a combination of organic and acquisition growth.
• Cash flow from operating activities at 13.5m, up from FY23s 9.2m – a 46% increase.
• 12.9m outlay in investing activities – 7.7m on two acquisitions, 4.2m on investment in organic site expansion and 1m in repayments.
• Cash balance remains healthy at 7.2m despite going backwards due to above investment.

In isolation, H2 saw a small improvement to revenue vs H1, while sites under management was much improved. Net profit after tax wasn’t as strong due to a combination of FX movement, tax adjustments and ongoing investment.

Like @Noddy74 suggests, some might look at this result and think 'WTF'. But this is where we are potentially at an advantage against a good portion of the schmucks on HC but also those in the industry that monitor 745 companies. Lift up the bonnet. Overall, FY24 resulted in a strong improvement in earnings, higher cash flows and continued expansion to international operations. Perhaps most pleasing is the ongoing evidence of scaling -- key business costs represented 38% of revenue in FY23, whereas they dropped to 34% in FY4, despite continued expansion. For those that query the competitive advantage for a small mundane parking business, this is it -- the economics and ROE are fantastic and will continue to be so provided management keep their feet on the ground.

The current market cap is just under 190m, with a revenue multiple of 3.5x. In return I am getting ROCE of around 20% and a growing, profitable business with significant runway ahead of it. With the share price where it is, I don't think we are far away from fair value. I plan to update my DCF/valuation in the next 24 hrs.

Key risks remain regulation, particularly the ongoing discussions in the UK, in addition to poorly executed expansion. I anticipate a decent outcome for Smart Parking in the UK, but an unfavourable decision could result in a very ugly short to medium term impact. I don't think this is likely. Agree with @mikebrisy that Qld isn’t critical to the business but remains a nice to have.

So SPZ is being spanked for it's drop in NPAT. It's fallen 13% at time of writing despite:

Increasing revenue 21% year on year.

Really good growth in sites.

Increasing free cash flow.

I am confident in the business so for me this is an opportunity to top up. I just have... Does the increase in costs and drop in NPAT reflect a lack of discipline? To me, it's the cost of a growing business and there will be up years and down years while the business grows. I would expect as the business matures it's larger footprint will smooth some of that out.

The key thing here is I don't see a new regulatory risk which would be a real orange flag.

All of that said, always keen for alternate views.

Up 13% yesterday on volume of $371,823 with no news out. Smells like an insto buying in or adding up.

I don't mind that at all. The current valuation of ~$185M may look a little sharp on a projected ~$5-6M of profit, but under their adjusted EBITDA, which I can accept in their case, it's still reasonable coming in around 12x.

On 13 March, CEO Paul Gillespie sold around 2m shares on-market at roughly A$0.44 cps. This equates to about 25% of his direct individual holding at the time of the trade.

With the share price trading close to all time high levels, I am not too alarmed by this.

Nice little acquisition by smart parking today in the UK sector.

I wonder if this is increased confidence that the UK segment regulation will be favourable or they have struck a deal with a competitor during a moment of concern. Seems like a well priced deal.

held

Thanks for organising the meeting this morning! Management took us through the presentation released to the market on monday and added some useful commentary and details around the edges. My main take home message is that on the surface they have a genuine opportunity to grow revenue and earnings for many years ahead. Mamagement appear competent and level headed. I had been watching this one for a while and have taken a position in real life today!

SPZ results were mixed and the market appears to agree.

Revenue result at $26.7M was ahead of my expectation.

Extra revenue has not resulted in the PBT I was hoping to see as expenses have increased:

Employee expenses up 15%

Depreciation up 24%

Other up 22%

Let's see what they have to say on the call.

1H24 Results due Monday 19 Feb.

Reviewing my expectations prior to the release to gauge company growth projections.

I expect to see the following as a minimum:

1H24 Rev $26M

1H24 NPBT $5M

Sites 1230

Expect costs to increase to accommodate German rollout but hopefully these costs are offset by increased revenue.

Anything less will be a disappointment. Better is a bonus.

Updated broker report from Capital Markets for Smart Parking. Not too many changes from previous report but all positive it seems.

SPZ report Capital Markets 10 Nov 2023.pdf

Nessy

This article by the Verge is a good read, relating to GM-backed robotaxis in California having their permits suspended due to the amount of problems they are causing.

Driverless vehicles are something I monitor with the Smart Parking thesis -- and will continue to do so -- but I don't think we are anywhere near having a decent portion of driverless vehicles operate. The issues being experienced in California reflect this to an extent.

Smart Parking (SPZ) are due to release FY23 results on Monday.

While there should be no surprises to the market (as the market is updated with quarterly results) I find the growth profile of SPZ quite compelling.

Expect FY23 Rev of at least $43.5M+ (3Q23 $32.5M cumulative) which equates to a 2 year compound growth of 45%.

Sites and breach notices have been growing at +30% over the previous year.

Will be looking for meaningful growth in Germany and some update on the Queensland regulatory issues.

Share price appears significantly undervalued for the growth achieved and outlook. Possibly some hesitation due to regulatory risk?

Will update valuation following release of results. 

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.

Non-Executive Director Fiona Pearse recently bought some shares on market, totalling $38,000. Fiona now holds 783,000 SPZ shares, having previously held 613,000.

Fiona has extensive commercial and financial expertise gained from a long career at global companies BHP and BlueScope Steel. She has had a position on the board since 2019, so she knows the business well.

Always good to see some insider buying following some share price weakness.

Heard on ABC radio this morning that the Qld Government will from next week prevent companies from access to private registration details of vehicle owners.

No announcement from SPZ though.

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]

Smart Parking released a presentation this morning prior to going on Coffee Microcaps. I don't think Mark has posted the videos yet but when he does it will be worth a watch as it includes a roll call of Strawman member favourites, including Alcidion (ALC), Spectur (SP3), Symbio (SYM) and AVA Risk (AVA). Anyway, the SPZ presentation included site and financial updates.

The good

• They continue to gain sites and were managing 900 as at 30 Sep (vs 839 at 30 Jun)
• Revenue for the quarter of $10.8m, up 21% vs pcp
• Substantial new record of breach notices issued
• APAC growth appears to be strong, at least in terms of breach notices, with PBNs in Q1 only slightly less than the first 3 quarters of last year combined

Not so good

• Cash is not so good. Cash is down from $11.4m at year end to $9.3m at 30 Sep. In part this can be explained by $1.8m of capex and $0.4m of share buy backs, but they also reported $2.7m of 'adjusted' EBITDA - where's that? Hopefully just some temporary working capital movements that will resolve by 30 Dec.
• Technology segment didn't really get a look in but the combined revenue numbers suggest it didn't contribute much to the total
• Also, despite the growth in revenue, the PBN number growth suggests they're not recovering as much per breach. FX will be playing a role here.

On Watch

• Definitely cash. I'd want to see a decent turn around in Q2.
• The UK macro and FX

On balance I think the message is still the same; they're delivering profitable growth. I expect them to be able to scale pretty efficiently too, with top line growth falling pretty efficiently to the bottom line. That last bit isn't as apparent yet as I might of originally hoped but I think you can give them a bit of a leave pass considering how early they are rolling out in Germany, QLD and NZ and the investment that will require.

[Held]

Smart Parking released its annual report on Friday and there were a couple of tidbits that signaled strong growth is continuing.

Sites under management (their key metric) grew from 839 on 30 Jun to 896 on 23 Sep. It's up 7% QoQ and 21% YoY. The number of breach notices issued for Jul and Aug was 119,663, up 26% compared to Jul/Aug 2021. Management "is seeing growth in the car count and contravention rates increasing".

Offsetting that is the bloody new UK conservative government, who are making Boris Johnson's regime look competent. Expansive fiscal policy, while the BoE is implementing contractionary monetary policy, has sparked fears of a longer and deeper recession. I view SPZ as somewhat defensive but not immune to such an event. Of more immediate concern is the impact it's having on the pound, which like all currencies is getting smashed against the USD but is also deteriorating against AUD. It's worth bearing in mind that most of SPZ's revenue AND costs are in GBP, but the downside of it being a profitable business is they don't offset. Truss & co have started walking back some of their more egregious policies in recent days and this has eased pressure on the pound, but they're not exactly inspiring confidence.

The UK Parking Code of Conduct is still withdrawn for further consultation.

Bottom line - bottom up it still looks good to me but I did take a little a little profit in my real life portfolio to reflect the risks above. It is still an outsized position for me.

[Held SM and IRL]

Thanks @Strawman. I really enjoyed this meeting. First of all, let me start by saying I am a fan of management; they are doing a great job. Paul in particular has turned around what was once an unfavourable business with lots of problems in the UK. They really appear to be hitting their stride now. 

I found both transparent, no bullshit -- even if Paul's initial pitch was very scripted. When @Strawman started to prod, both loosened up a little and this is where the meeting got interesting. The elaboration into their business model was fascinating. A lot of this I had obviously come across before, but there were bits and pieces that were new to me -- even as an investor in SPZ for the last few years.

Some of my notes are recorded below:

Business model expanded

Smart Parking will approach sites and offer them their services. For a business, this is normally beneficial -- it frees up parking for genuine customers/members. For shopping centres and the like, this should in turn enhance customer satisfaction and bring more shoppers through the door -- you are much more likely to shop when you can find a convenient park outside. The real benefit for the site owners is Smart Parking own the product and take on all the CapEx costs. The business won't have to pay Smark Parking a fee, nor do they get lumped with installation, signage fees etc. As I understand it, the site owners pay nothing. In fact, the business will normally get to keep the parking fees from the parking machines and the like. The catch for Smart Parking is they will typically take all the revenues obtained from PBNs associated with the sites. In more competitive markets (some areas of the UK), Smart Parking might reach an agreement to take a certain cut of the revenues. You can see how the business are able to bring site owners onboard. In the majority of cases you would expect it is a no brainer for them -- more regulated parking spaces, enhanced foot traffic and on top of that parking revenue -- all for no outlay! For Smart Parking, they don't have to pay the overheads associated with the parking sites, only the small CapEx costs associated with their technology, sensors and the like. This reduces a lot of the usual significant costs for SPZ and enables them to be incredibly 'capital light'. That is a great business model. A win/win for both site owners and Smart Parking. 

Cost structure

A typical site installation costs somewhere around 8000-10,000 pounds. The business tends to recap CapEx investment after approximately 7-9 months of running the site, with minimal costs incurred from this point onwards. 

A typical site will issue around 80 tickets (breaches) per month, at an average of £31.50 per ticket. It costs around 5 dollars per ticket to source the drivers details (name, address etc), print and then post the ticket. This fee is cheaper in NZ, but more expensive in Australia.

The average contract term with new sites is three years.

Churn is often initiated from SPZ's end -- the company might not be making the money it wants, or the margins might not be competitive enough, so they are often prepared to walk away. For instance, SPZ lost 40 sites in H1 FY22 due to a margin battle. This isn't the end of the world for the company. They can simply use the technology elsewhere, but management stress it is also not a CapEx holiday. They still have to organise the signage, staff to install etc. I like the fact they are prepared to cut losses on investments deemed too difficult or surplus to requirements. Even if this impacts sites under management (short term). They really seem focused on shareholder return here. 

Fines

• Collection rates: in the UK, tickets are 100 pounds. If paid within 14 days this gets reduced to 60 pounds. The fine is referred to a debt collection agency after 28 days, whereby the fine increases to 170 pounds. SPZ retain 130 pounds of this.
• Ticket average: of 100 tickets, 15-18 are cancelled for whatever reason - appeal, actual customer etc. 55 out of 100 would actually result in fines. This is where SPZ make the bulk of their revenue. 

Competition

Management acknowledged their competition, but noted their technology was the key differentiator in most markets -- essentially their moat. This is the case in the Australian and German markets in particular -- especially the latter. While there is other competitors, they lack the technology of SPZ or the money to implement similar technology.

Thanks again for hosting @Strawman.

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

@Wini released a blog post about Smart Parking yesterday (27 June) -- link here.

The post provides a compelling 'bull case' for the business, while also highlighting key risks. I encourage those with an interest in the business to give it a read.

@Wini hopefully you are OK with this being posted here. Sing out if you aren't and I can remove the post. :-)

We weren't provided with any revenue or profit figures, but still get some insight into SPZ's H2 period.  

- Parking breach notices (PBN) are forecast to increase by around 70% vs PCP. While this figure hasn’t moved much since the H1 increase, it marks a strong year for SPZ. Q3 was the slowest quarter of the year for PBNs issued, while Q4 is forecast to be an improved one (second highest).

- Sites under management was recorded at 816 (as at 31 May), an increase of 32% PCP. A total of 99 sites have been added thus far in H2, noting June figures still need to be added. A breakdown based on region (and churn) is recorded below. While total sites under management (99) wasn’t anywhere near as high as H1 (176), churn in H2 has been much more respectable – 20 in H2 vs 58 in H1.

- 42 sites are now up and running in the APAC region, while the sales team was doubled to ‘capitalise on market opportunity’. If my calculations are correct, total sites under management has effectively doubled in H2 (from 21 to 42). PBNs in the region continues to trend upwards nicely (below).

- As for their push into Germany, four customer contracts were signed, with two locations live and generating revenue. 0.5m OPEX costs for the half suggests they aren’t throwing lots of money down the drain as they try and shift into a new market. This is obviously pleasing in this current environment. 

Smart Parking continues to be one of my higher conviction holdings. Pending the release of the FY result (where I will have a proper dig into the financials) SPZ is high on my 'top up' list at the moment. They continue to grow at impressive levels, they are profitable (based on H1 reporting) and have a solid balance sheet -- the latter provides them with stability and an ability to fund their growth strategy inhouse. They aren't impacted by supply shortages and are in a good position to make strategic acquisitions when the opportunity arises. Provided the FY report reflects more of the same, management continue to demonstrate that they are solid capital managers.

@Noddy74, any differing thoughts?

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]

Catching up on earnings, starting with Smart Parking. 

I will try not to repeat @Noddy74’s recent straw as this does a great job of summarising H1 FY22. It all looks positive to me with the exception of stalling operating sites, but it’s pleasing to see operating sites have already seen an uptick in Q3 FY22. In addition, I like the fact management aren’t scared to highlight and address what may be seen as limitations in the reporting period. There isn’t much bullshit with them – and I think that goes a long way to getting shareholders onside, particularly noting past issues that have plagued SPZ. 

To perhaps take this back a step, what am I looking for as SPZ continues to expand into new markets? 

- costs under control 

- evidence of scale

- strong performances in main market/s to support growth elsewhere 

SPZ key metrics -- H1

- Revenue and EBITDA both ahead of guidance -- 17.3m and 5.1m respectively. 

- Gross profit almost doubled, demonstrating scale. It is excellent to see material revenue increase not resulting in ridiculous increases in cost. We are also continuing to see an increase in operating leverage – EBITDA margins have steadily increased since FY20 yet costs continue to decline. The latter is a real testament to management. 

- Sites under operation has stalled since the last reporting period, but still up 19% vs pcp. Noddy addressed this in his straw – no issues here and management have reported an increase to sites in Q3 (to 772 as at Feb 2022)

- cash holdings of 11.3m with no debt – well placed to expand operations into Aus, NZ and Germany and make sensible acquisitions should the opportunity present itself. Also pleasing to see more cash reserves since 2021 despite SPZ undertaking a share buy back. 

- Parking breach notices well up on last year, demonstrating the post-pandemic ‘turnaround’ play – more cars on the road (and with that a requirement to park) resulting in more revenue for SPZ. 

- Expansion into NZ and Australia is tracking along nicely. The former is already profitable having acquired its first customers in March 2021, and management suspect Australia will be EBITDA profitable in H2 FY22. That is bloody impressive. The movement into Germany is new for SPZ, but as Europe’s largest population, should they gain traction in this market it will be significant for the company.  

EPS is positive – 0.6 compared with last year’s (0.41). In addition growth margins are up slightly to 71% (from 65%). This is fundamentally a more efficient and profitable business than it was 12 months ago. The thesis continues to play out here – the business is profitable, has no debt and continues to expand its operations into new markets at scale. Based on these factors, I think this is largely why SPZ was somewhat protected by the recent sell off. There were no ridiculous multiples or valuations to be seen here – just a solid, well-ran company that continues to fly under the radar.

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]

A market analysis report was recently released on Grand View Research which focuses on the smart parking industry. A few takeaways from the report: 

• The global smart parking systems market size was estimated at USD 4.42 billion in 2020. It is expected to grow at a compound annual growth rate of 21.5% from 2021 to 2028 to reach USD 19.29 billion by 2028.
• A short term decline due to the pandemic has impacted smart parking. However, post pandemic, people are expected to use their vehicles for solo travel and avoid shared mobility, including public transportation. This is expected to fuel traffic congestion in numerous metro cities across the globe. The increase in traffic congestion is expected to propel the demand for smart parking solutions over the forecast period.

While it mainly pertains to the US market, it is still an interesting read for those interested in the smart parking and analytics industry. I particularly agree with the analysis re: car travel tailwinds over the next few years. The report can be located here. 

A quick recap

SPZ is a bit of a ‘turnaround’ story for me. The business has had issues in the past and were rightly punished by the market over several years, to the stage where they were oversold – with a 20-million revenue business dropping to as little as 10c. Yes, most turnaround stories don’t go the way we would hope as investors, but there were never structural issues here – their dilemmas mainly stemmed from poor decisions at mid/high-level management. They replaced various division heads and they have steadily shown signs of improvement. And then along came Covid-19… 

SPZ’s business model was hammered during the pandemic. Most of their business is in the UK and most of their revenue comes from enforcement and parking-related fines. Seven months of UK lockdowns and the rug was well and truly pulled out from under them. But the business demonstrated impressive resilience and pulled through. Impressively, they made a profit last year by cutting costs and through a somewhat fortunate one-off VAT payment – despite a slight revenue decline. 

The business continued to grow during the pandemic; sites under management from 496 to 619 from FY20 to FY21. Unlike FY21, UK restrictions have now been relaxed, resulting in people returning to their everyday lives – and more importantly cars being back on the roads / requiring parking. 

Recent company updates

The recent reporting released by SPZ provides a few indicators into how the company is tracking in FY22. I like what I am seeing: 

• FY22 has seen sites under management increase to 737 (as of 30 Sep 21), both the result of an acquisition and organic growth. This is already almost 20% growth from FY21 figures in Q1 alone. The business is targeting 1000 sites by June 2023. This figure was initially deemed a little optimistic but to their credit they are tracking along well. 
• The company has an existing order book of 3.3m, including Gatwick airport installations (deferred from Covid-19) and new sites in Australia and NZ. The latter also demonstrates SPZ’s expansion into the Australasian market is occurring quicker than initially anticipated. 
• What I found most impressive was the company issuing a record 48,227 parking breach notices in August 2021 (compared with 33,436 in August 2020 and 26,465 in August 2019). As indicated, this is the main revenue driver for the business. Further, it demonstrates people are getting on with their lives post-pandemic; it bodes well for SPZ and other business in the UK. 

They persevered during Covid and continued to increase sites under management while keeping the lights on. Their healthy balance sheet, like many, was fundamental to their survival. While many were reducing staff and applying for government grants during Covid-19, SPZ were completing a share buyback at around the 17c levels! The aftermath of the pandemic (in the UK) has arguably created some acquisition opportunities given many smaller businesses haven’t fared so well. Their recent acquisition in August 2021 appears to have been a good one, and with 10 million in cash holdings I expect the business will continue to look for strategic acquisitions in the short to medium term. 

My conviction is growing. I forecast significant increases to revenue in Q1 and Q2 FY22, provided the business continues on its current growth trajectory and the UK remains out of lockdown. I will be looking to add at these levels and think SPZ is flying under the radar. 

DISC: HELD

Edit - spelling

Following movement to Smart Parking’s (SPZ) share price in the last month, I figured now would be a good time to post a straw and share a few thoughts about my interest in the company and thesis.

Overview

SPZ is a global company concerned with the sale of technology, hardware, and software for parking solutions. Some of their technology consists of automatic number plate recognition, digital guidance signage and in-ground occupancy sensors. There is also an R&D component to the business (to ensure they can continue to develop innovative parking solutions). They operate in 17 countries and have offices in Australia, NZ, and the UK.

Their target customers include shopping centres, hospitals, supermarkets, airports, commercial parking sites, universities, and large-scale municipal street environments. Gatwick Airport – UK’s second largest airport – is an example of a reputable/prominent customer. More information on this here.

Like many industries, the pandemic has had a significant impact on SPZ – which relies on vehicle use, subsequent parking, and parking breaches/fines. Fortunately for the company and shareholders SPZ is showing signs of recovery, with revenues increasing again and delayed projects resuming.

As a company, SPZ is not particularly ‘sexy’. The share has traditionally traded with limited interest or trading volume. I think it was Noddy who recently mentioned they really like when companies, particularly those with self-declared conviction, continue to meet corporate objectives and grow – but do so relatively unnoticed. SPZ is a similar story for me in the last 3 years.

Thesis

• Management have steadily grown the business over several years, achieving continued expansion and growth in ‘sites under management’ (SPZ’s key metric – parking facilities where technology has been installed).
• In the last two company updates SPZ reported technology rolling out at 85 and 123 sites respectively, with removal of tech occurring at 5 and 13 sites. As of 31 May 2021, they were operating at 612 sites in total, up 23% from the previous year. SPZ is installing technology (and maintaining customers) at a much higher rate than removal/customer churn is occurring.  
• SPZ have recently rolled out operations in NZ, with 6 sites installed (performing ahead of expectations).
• Growth tailwinds for the ‘smart’ parking industry: with real estate and parking becoming increasingly more expensive, I think their is merit in businesses wanting to better manage and monitor parking using identification technology. This assists with monitoring consumer trends and movement and facilitates enhanced accountability/enforcement for fines etc. Other tailwinds for the industry include:   
  • further easing of restrictions.
  • growing vaccination rates across UK and other markets adding to consumer confidence.
  • ‘staycations’ in the UK and other markets encouraging driver motorist behaviour.
  • continued expansion in NZ and AUS.  
• In the last reporting period, the company reported cash holdings of 9.3 million. They are unlikely to need additional capital over the next 12 months. The company also commenced a share buy back in Feb 2021, with 1 million bought back thus far – however yet to scratch the surface of their proposed 5m.
• Lots of insider buying in the last 6 months, with no selling recorded (Simply Wall St). Microequities Asset Management recently purchased over $2million worth of shares (split across June and March 2021) at 0.17c.
• Experienced management team and BOD, led by Paul Gillespie who has been CEO since 2013. Insider ownership is recorded at 7% according to Simply Wall St.  

Monitor

• I want to see sites under management continue to tick along at growth rates around 15%>, with removal of tech occurring <15% mark – achieving this confirms customer retention/stickiness and suggests continued value in their product.
• The NZ and Australian markets are significant growth opportunities for SPZ – continued expansion in both countries is important for the thesis to remain intact.
• Cash burn rate - history of churning through cash quickly, particularly last year. 
• The last reporting period was impressive, with net profit increasing to 4.5 million (compared to 1.5 million in previous reporting period). This result is a little misleading and due to a one-off benefit of 6.9 million relating to a VAT dispute.

Risks

• SPZ is still unprofitable. This is likely to remain the case for another 12 months.
• They are highly vulnerable to any lockdown measures. Any extended lockdown period, particularly in the UK, will have a significant impact on SPZ’s growth trajectory.
• Finico owns 33% of the company (Simply Wall St) – removing/selling a large portion of their position would put SPZ’s share price under considerable pressure.

Disclaimer, hold in RL portfolio – purchased a small holding at 12c.

Smart Parking Limited (ASX:SPZ) UK VAT

The settlement results in:

•  HMRC withdrawing assessments raised in August 2019 for $3.0m which were provided for in the FY19 accounts.
•  HMRC refunding an overpayment of input VAT of $2.9m.
•  SPZ writing back to profit $6.9m of prior year input VAT which is a one-off benefit in H1 FY21. This comprises the reversal of a $4m provision in the FY20 accounts for unpaid input VAT, in addition to the cash refund of $2.9m for overpaid input VAT.
•  SPZ withdrawing Notices of Appeal that had been lodged in relation to the matter.
•  SPZ restricting input VAT on a small number of leased sites where SPZ acts as principal.