When it was trading at R650 a share a few months ago, IM wrote on Karooooo as a solid pick.
With the stock now at R695, that turned out to be the right view based on first-quarter results and the strength of the story. With second-quarter results available and the share price having jumped even more (with a new 52-week high of R775), has anything changed to temper the enthusiasm?
For those who have been involved in Karooooo since the pandemic, it’s refreshing to no longer read about how lockdowns are affecting the growth story in Asia. It’s also great to see Carzuka out of the system, with management having learnt a lesson from that ill-advised foray into used car sales. Carzuka made an adjusted loss in earnings before interest, tax, depreciation and amortisation (ebitda) of R12m in the comparable quarter and had no impact on this quarter, so that was a helpful boost to year-on-year profitability.
In terms of top-line growth in the core Cartrack business, Karooooo is doing well. Subscriber growth was 17% and, encouragingly, the rate of net subscriber additions increased 18%, with almost 90,000 net new subscribers for the quarter.
As the base of subscribers increases, so too must the rate of subscriber growth to maintain the overall growth rate for the group. The denominator is increasing all the time, so the numerator needs to follow suit.
Due to the extensive global subscriber base at Karooooo, the rand got in the way of things for once. Subscription revenue was up 15% in rand and 22% in dollar. This doesn’t include the revenue in Karooooo Logistics, which jumped by a lovely 40%.
Where Carzuka was just a silly distraction, Karooooo Logistics has turned out to be useful. It is described as a delivery-as-a-service model for enterprise customers wanting to scale and digitalise their e-commerce operation, with Karooooo connecting them to a fleet of third-party delivery drivers. There’s a telematics theme tying this together with the Cartrack business.
It’s still small compared with Cartrack though, with adjusted ebitda of R8.1m vs the all-important Cartrack at R453m. This is why the 23% growth in adjusted ebitda at Karooooo Logistics didn’t have much impact on group growth. In fact, were it not for the disappearance of Carzuka, investors might be getting nervous here. Adjusted ebitda in Cartrack grew only 9%, as margins contracted by 200 basis points (bp) to 45%.
Cartrack expenses increased 20%, driven by sales and marketing expenses up 33%. It calls this a “strategic investment in customer acquisition”, which could well be a corporate spin on “wow, it’s getting more competitive out here” — so keep an eye on that. General and administrative expenses at Cartrack grew 18%, so the infrastructure expenses are quite burdensome as well.
So, if there’s anything to worry about here, it would be expense growth in Cartrack. To help keep investors in a jovial mood and focused on the good stuff, Karooooo revised guidance for subscriber numbers for financial 2025 higher, despite only having two quarters out of the way. It now expects to reach between 2.3-million and 2.4-million subscribers, a 100,000 increase in guidance.
Cartrack expenses increased 20%, driven by sales and marketing expenses up 33%
Subscription revenue has been revised R50m higher, to a midpoint of R4.05bn. Karooooo managed R3.54bn in 2024, so it expects growth of about 14.5% at the midpoint. This is despite an expected 19% increase in subscribers for the full year, so the rand is playing a role here. Is this all the rand though, or is there average revenue per user pressure in the business?
As for operating profit margin, it expects between 27% and 31%. After achieving 30% in Cartrack in each of the previous two years, that’s a deterioration of 100bp at the midpoint of guidance. This creates more question marks around the near-term performance and whether the share price (up 50% this year) has run too hard.
On a trailing sales multiple of 5.3, way above the 3.6 we saw a year ago, Karooooo has made it back to levels we saw at times in the pandemic. The earnings multiple of 25.6 isn’t outrageous for a JSE-listed quality stock — but isn’t a bargain either.
The share price looks to be taking a breather at the moment, having had a spectacular run this year. IM would not sell Karooooo as it’s a long-term play, but would be inclined not to add at these levels either. It may well be stuck sideways for a while, especially if the cost pressures continue.
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