In November 2024, just three short months ago, a review of Karooooo revealed a share price that had been on a strong run up to new 52-week highs.
The market had taken a breather, which is a normal part of the process when the line on a share price chart heads to the top right-hand side of the page.
Betting against momentum often leads to deep regret, so investors have to be careful about selling and taking profits on such a strong story. Traders will tell you to “let your winners run”, and that can be a sound strategy, even when valuations start to make you nervous.
So, trading at R695 at the time, the recommendation was to hold Karooooo with a target price of R750. Even though we’ve only had one quarter of earnings since then, the value of holding and believing in momentum rather than selling into strength has been made clear. This is because the share price wasted no time at all in reaching that target and going well beyond it, which of course means that a buy recommendation would’ve been more correct. Still, by holding, investors could’ve ridden the chart up to levels of R827.50 at the time of writing.
Admittedly, that’s some way off the 52-week high of R925 that was reached in early January. As is the case for many local stocks, it’s been a tough start to the year.
A rally of this nature needs to be supported by strong underlying earnings growth. Thankfully, Karooooo delivered exactly that in the latest set of numbers. Cartrack, the key business in the group, achieved subscriber growth of 17%, driving growth in subscription revenue of 14% as reported in rand. Currency movement is one of the reasons subscription revenue doesn’t always match the growth in subscriber numbers. To prove that point: subscription revenue measured in dollars was up 19%!
Karooooo Logistics, the business-to-business delivery-as-a-service side of the business, is still small but well on its way to becoming more interesting. For context, this segment delivered revenue of R109m, vs R1.03bn of subscription revenue in Cartrack. This puts the contribution at roughly 10.5%. You can expect to see this contribution increasing over time, as Karooooo Logistics grew revenue by 20% in rand year on year. That’s meaningfully higher than the 14% rise in revenue in Cartrack.
When you look at adjusted earnings before interest, tax, depreciation and amortisation (ebitda), the comparison gets even more interesting. Adjusted ebitda margin in Cartrack dipped from 49% to 47%. Though Karooooo Logistics is still firmly in the scale-up phase and nowhere near the levels it should hopefully reach, an increase in margin from 8.6% to 9.1% is still helpful. Due to the much lower margins in that business, though, its contribution to group adjusted ebitda is just 2%.
Value investors probably would not go near Karooooo at this valuation, which is a pity
This means that though Karooooo Logistics is a feel-good story, a decision to invest in Karooooo needs to be driven by belief in the Cartrack model. The core metrics of the business remain solid in terms of customer lifetime value vs. customer acquisition costs. Though adjusted ebitda can vary from quarter to quarter, this is usually due to timing mismatches between revenue growth and investment in customer acquisition costs.
The group is also investing in its underlying infrastructure, with a 25% increase in general and administrative operating expenses. Though it’s never great to see a growth rate in overheads that is running ahead of revenue, Karooooo has a strong track record of delivering organic growth initiatives.
Over nine months, earnings per share have increased 30% on an adjusted basis. In the latest quarter, it grew 21%. Though there’s a slowdown here over the year, these are still meaty growth rates. Guidance for adjusted earnings per share for the 2025 financial year is R27.50-R31. At the midpoint of that range, Karooooo is trading on a forward p:e of 28. As high as that sounds, it’s a multiple that can arguably be justified by the current earnings growth.
Still, at this multiple and with the underlying cost increase in the business, it would take just one disappointing quarter to send the stock price plummeting. Despite the small sell-off thus far in 2025, I’m still holding my shares for the same reasons that I decided to hold in November.
Growth investors with a long-term mindset could look to add at these levels, or at the very least watch the chart carefully to see when it starts to turn higher. Value investors probably wouldn’t go near Karooooo at this valuation, which is a pity, as they’ve missed out on a proudly South African growth story of note.
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