Zimele Mbanjwa & Chantal Marx
In October 2023, Mix Telematics announced that an agreement had been reached with PowerFleet, via a merger subsidiary (Merger Sub), that would see Powerfleet acquire all of MiX Telematics' (MiX) outstanding shares in exchange for 0.12762 newly issued shares of PowerFleet. The effective merger would result in the formation of one of the biggest, globally-diversified fleet management Software-as-a-Service (SaaS) and Internet-of-Things (IoT) providers.
The implementation of the merger will involve the delisting of MiX from the main board of the JSE. In sequence will be the secondary inward listing of PowerFleet (primary listed on the Nasdaq) on the JSE main board. Upon conclusion, former MiX shareholders will hold ~65.5% of the share capital of the merged entity.
Steve Towe (the current CEO of PowerFleet), David Wilson (the current CFO of PowerFleet) and Michael Brodsky (the current chairman of the board of PowerFleet) will remain in their respective roles. Ian Jacobs (the current chairman of the board of MiX) and Michael McConnell (not currently a MiX director) will be joining the PowerFleet board and Stefan Joselowitz (the current president and CEO of MiX) will be retiring at the conclusion of the merger.
About MiX Telematics
Founded in 1996 by current CEO, Stefan Joselowitz, MiX is one of the foremost global providers of integrated fleet and mobile asset solutions delivered as SaaS to over 1 million subscribers and 130 fleet partners. The company's products and services are diversified across enterprise fleets, small fleets, and individual consumers with solutions to help end users reduce fuel and other operating costs, improve efficiency, enhance regulatory compliance, promote driver safety, manage risk, and mitigate theft. MiX has notable global reach with subscribers spanning across more than 120 countries, and the company itself having offices in South Africa, the United Kingdom, the United States, Uganda, Brazil, Australia, the United Arab Emirates, and Mexico. Consumers are also diversified across various industries including Transport & Logistics, Construction, Agriculture, Government, and Oil & Gas to name a few
The group derives ~87% of revenue from subscription fees for its solutions, including the use of the SaaS fleet management solutions, connectivity, and in-vehicle devices. Subscription revenue is driven primarily by the number of subscribers and the monthly price per subscriber, which varies depending on the services and features customers require, hardware options, customer size and geographic location. As at 31 December 2023, MiX reported subscriber numbers of 1 142 135 (up 19% y/y). Customer contracts typically have a three-to-five-year initial term, which is typically followed by renewal for fixed terms of between one to five years. In FY23, the group reported an annual customer retention rate of 99% in fiscal year 2023. Sales of hardware, that is in-vehicle devices which are used to collect, generate, and transmit the data used to enable the SaaS solutions, account for the remaining 13% of revenue.
The group has six geographical reportable segments corresponding to the group's five regional sales offices and the Central Services Organisation (CSO) that wholesales products and services to the sales offices who, in turn, interface with our end-customers, distributors and dealers.
In the South African market, notable competitors for MiX Telematics include Cartrack (wholly-owned by Karooooo). Cartrack currently has 1.95 million active subscribers across 23 markets. Another notable player is Netstar (wholly owned by Altron). Netstar's reported subscribers currently stands at 1.5 million. In FY23, MiX reported revenue of R2.46 billion (NetStar: R1.86 billion, Cartrack: R3.08 billion) implying an average revenue per subscriber of approximately R2 459 (NetStar: R1 356, Cartrack: R1 791).
MiX recent results
For the third quarter ended 31 December 2023 (3Q24):
About PowerFleet
Headquartered in New Jersey, USA, Powerfleet provides Internet-of-Things (IoT) solutions that are aimed at assisting a variety of customers in commercial and government sectors. The group reports to having around 8 000 customers worldwide including notable names such as Avis, Walmart, and Toyota. The group offers a fleet intelligence ecosystem platform centred around safety & security, advanced fuel management, maintenance and performance, regulatory management and compliance, visibility, and resource management as well as sustainability. The company has global reach, with offices in the USA, Mexico, Argentina, Brazil, Israel, Germany, United Kingdom as well as South Africa. Product offerings include vehicle telematics, material handling telematics, asset tracking, video services like dashcams, container, chassis and trailer tracking, as well as tools essential for compliance and workflow management. The SaaS cloud-based applications take data from PoweFleet's IoT devices and ecosystem of third-party and partner applications and transforms it into insights for customers to increase efficiencies, improve safety and security, and increase their profitability in the form of reports, dashboards, and real-time alerts. The group notes that its customers typically get a return on investment in less than 12 months.
The company's solutions resonate with a variety of end users, with customers in industries such as manufacturing, wholesale and retail, pharmaceutical and medical distribution, construction, mining, utilities, aerospace, vehicle rental, as well as logistics, shipping, transportation, and field services. With 28 patents and patent applications and over 25 years' experience, PowerFleet is well-positioned to evolve its offerings for even greater value to customers through cloud-based applications for unified operations.
The group reports results via two segments - Products (~42% of revenue) and Services (~58% of revenue). Product revenue is recognised when the group sells its systems and products, while service revenue is derived from customer SaaS and hosting infrastructure fees. The company also earns other service revenue from installation services, training, and technical support services. Over the last five years, Powerfleet has seen strong growth in revenue generation at a compounded annual rate of 26%, driven mostly by Services (+49% per annum) with product demand also increasing at a decent rate (+11% per annum). However, operating expenses, particularly Selling, General & Administrative Expenses (SG&) (salaries and related expenses, professional fees, and marketing and travel expenses) have, over the years, been higher than the gross margin leading to the group consistently reporting operating losses. Services have maintained healthy margins, while Products have seen a deterioration over the years due to mix changes, higher costs associated with supply chain issues, electronic component shortages, and inflation.
With a market cap of ~$108 million, Powerfleet is one of the smaller players in the US fleet management sector, which has a mean market capitalisation of over $5 billion. It should be noted that the market in the US is rapidly evolving, competitive, and highly fragmented, with the majority of vendors offering solutions addressing specific industry needs or specific solution sets. As such, PowerFleet competes with organisations varying in size, including many small start-up companies as well as large, well-capitalised entities.
Powerfleet recent results
For the third quarter ended 31 September 2023 (3Q23):
Rationale for merger
Global companies are increasingly looking to consolidate their fleet management systems by moving to providers that have global reach. This is primarily driven by the desire to have a secure centralised view across their fleets and impose set global standards specifically relating to driver management and safety. There is all the benefit and advantage of gathering vast quantities of data to draw new insights into their global fleet operations.
The most notable benefit of the merger will be that the merged entity will have access to a wider pool of capital investors which will allow for the facilitation of expansionary initiatives and accelerate growth, obtain scale, and create value for shareholders. The similarities between the two companies will see the combined company benefit from one another's complementary business models, markets, strategies, and operating platforms. This will come with a strong pipeline of new business opportunities and technology with an improved capital structure.
Addressable market
There have been substantial advances in the capabilities, reliability and affordability of technologies that can be used to cost-effectively collect and disseminate large quantities of vehicle data and video footage along with significant improvements in the performance, reliability and affordability of fixed and wireless networks, computing power and data storage capabilities, which have supported the rise of cloud computing that enables the delivery of SaaS.
Many fleet operators adopt fleet management software solutions to obtain greater visibility over their vehicles and mobile workforces, to achieve cost savings through efficiency improvements, including reduced fuel consumption, and to reduce regulatory compliance burdens. Additionally, the security of personnel and asset protection features afforded by vehicle tracking and monitoring, resulting in greater asset visibility and a lower impact of theft, are also important reasons for the adoption of fleet and mobile asset management solutions.
MiX believes that the addressable market for its fleet management solutions remains largely under-penetrated. Citing research by ABI Research, MiX notes that there were around 230 million commercial vehicles registered globally at the end of December 2022. Global fleet management penetration was estimated to be approximately 23%. ABI forecasts that by 2030, the number of registered commercial vehicles will be approximately 287 million.
In addition, there is also a large number of non-commercial passenger vehicles globally. The group believes the potential rate of consumer adoption of mobile asset management solutions is highest in developing regions where vehicle tracking and monitoring can help to improve security, and the stolen vehicle recovery rates.
What we like about the combined entity
What we don't like about this combination
Outlook and Valuation
We still expect subdued revenue this year and a strong improvement in FY25 and FY26, with a tailwind from higher software and services revenue. This should also aide in an expansion in margins that could also benefit further from anticipated synergy gains. We expect the combined energy to turn a profit this year (on an adjusted basis) and then to grow earnings quite strongly over the next three years. Cash flow generation is expected to improve and remain solid over our forecast horizon.
We estimate that the combined entity will be fairly valued at $265 million, or R4.9 billion at current exchange rates.
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