Tip from Imperial’s CEO: Have a closer look at MiX Telematics

Over the past few years I’ve been privileged to develop a good relationship with Imperial Holdings CEO Hubert Brody. A chartered accountant, Brody is softly spoken and economic with words. When he ventures an opinion, it has been carefully considered and assessed. So after he mentioned a few weeks back to keep an eye on MiX Telematics, we were sure to put the business into the CNBC Africa spotlight just as soon as we could. That happened today after the company released its third quarter results. MiX is best known in SA through its Matrix vehicle tracking system – but with lofty global ambitions backed by the claim that it is the biggest business of its kind worldwide, the interview with FD Megan Pidigadu lived up to its promise. The shares are on a rich rating, but as you’ll see from our discussion, its 24 PE is half that of similar North American listings. Brody, who is a director of MiX, is right. Definitely a company to do your homework on. – AH

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GUGULETHU MFUPHI: MiX Telematics, a JSE and New York Stock Exchange listed tracking solutions provider, has reported positive third quarter results.  Joining us in the studio now for more is Megan Pidigadu who is the Financial Director of MiX Telematics.  Megan thanks so much for joining us.  Definitely, this is a company that when Alec was looking through the numbers together with myself, he mentioned that it’s a phenomenal performer and an unusual that is probably best placed for positive performance.  Looking back at your last quarter, what’s been the success story behind MiX Telematics?

MEGAN PIDIGADU:  For us…this quarter we’ve been very happy with our subscription revenue growth.  We’ve seen an acceleration of that to 25 percent and that’s really the core driver of our business.  We’ve added over 24 000 subscribers.  We’re sitting in a rarefied stratosphere of 428 000 subscribers.  There are not too many telematics players – globally – that have that level of subscribers, so we’re very comfortable with the performance we’re putting in and the type of growth we’re getting.  We believe that we can continue to get the growth that we’re getting and take advantage of the space and growth opportunities in the telematics sector.

ALEC HOGG:   Hubert Brody, who is a guy we admire greatly in this program: he told us to look at you.  He said ‘next time MiX Telematics comes out with numbers, make sure that you chat to the company’, so that’s part of the reason, but you need to help us a little bit.  You talk telematics as though we all know what it’s about.  What do you think?

GUGULETHU MFUPHI: I have a small understanding.

MEGAN PIDIGADU:  Let me unpack it a bit.  If you look in the South African market, you probably know us best through our Matrix and beam-e brands, but that really is a small part of what we do.  The Matrix and beam-e brands are all around personal safety and security – so recovering vehicles.  However, what’s really driving our growth is our fleet business, and that’s really a global business.  It accounts for 70 percent of our business, and there we’re tracking vehicles for commercial companies who have commercial vehicles, we’re looking at the way drivers are driving, we’re reducing their fuel costs by ensuring driver efficiencies, we’re bringing down maintenance costs, and indirectly, we’re also bringing down CO2 emissions.  Generally, we tend to get a return of…between nine and 12 months a customer has paid for their service and are seeing savings related to their commercial fleet.

ALEC HOGG:   Nine to 12 months.

MEGAN PIDIGADU:  Yes, we’ll get a return.

ALEC HOGG:   So would you check for instance, if a driver stops at the side of the road to pick up a companion, then spends a little bit too long, and off he goes?

MEGAN PIDIGADU:  Yes, we do that.  We track vehicles and see how they’re driving.  We also look at if there’s harsh acceleration, and harsh braking.  That also has an impact on the vehicle and maintenance of the vehicle, so if we can get the driver to drive better, we decrease the rate of accidents, and we decrease the maintenance on vehicles.

GUGULETHU MFUPHI: So that’s a plus for logistics companies.

MEGAN PIDIGADU:  It’s totally a plus.

ALEC HOGG:   Sure, and for the drivers who then don’t kill themselves and others presumably.

MEGAN PIDIGADU:  Yes

ALEC HOGG:   What’s the split between South Africa and offshore?

MEGAN PIDIGADU:  From a revenue perspective, about 50 percent of our revenue is earned in South African rands and 50 percent comes offshore.  Of that, about 25 percent comes in US dollars.

ALEC HOGG:   I saw through the breakdown of your offices, you have an office in Uganda.  Now, I know this is a little bit off the topic, but we know that Uganda’s just passed some very heavy anti-gay legislation.  Richard Branson says he’s not going to do business there anymore and there are quite a few businesses who say they want out.

MEGAN PIDIGADU:  Yes.

ALEC HOGG:   Does that even come into the equation when you look at it?

MEGAN PIDIGADU:  We actually look at Uganda as a launching board into the whole of East Africa.  There are many oil and gas opportunities, and we align ourselves to where the oil and gas companies are.  That’s the reason for us selecting Uganda.

ALEC HOGG:   But you wouldn’t move across the border maybe to Tanzania.

MEGAN PIDIGADU:  That’s something we haven’t considered, but it probably is something we need to think about.

ALEC HOGG:   You mentioned oil and gas.  Why did you specifically focus on that area?

MEGAN PIDIGADU:  Oil and gas are very focused on safety of driving, and also adhering to a lot of compliance, so that is one of the other things we do.  In the oil and gas companies, they need to know how many hours a driver’s driven.  Has he rested when he should rest?  How many hours does he have to drive in a week?  When should he be taking time off?  That’s why we see quite a strong uptake of our solutions in the oil and gas industry.

GUGULETHU MFUPHI: Where is the innovation for this coming from – Africa or the rest of the world?

MEGAN PIDIGADU:  All the innovation sits in Stellenbosch.  We have a development hub down there.  We have 90 developers who develop our SAS platform, and that’s where it’s all coming from.

ALEC HOGG:   It’s such a good-news story.  South African innovation was pressing you on there, but from an investor’s perspective, you have to get a little bit worried when you see a PE of 24 times.  You’re going to make maybe 16 cents earnings this year.  You’re sitting at R4.50.  That’s a very rich rating.  You’re on some kind of a treadmill here.

MEGAN PIDIGADU:  We are on a treadmill, but I think we also believe that we can deliver on the growth story.  When we start comparing to our peers in the US, we’re actually not a highly valued share.  I think that from a South African perspective, we probably do look like that. Some of our competitors in the States have double the PE’s we do, and it’s all about growth.  We believe that if we can take on the opportunities of growth, leverage on that, and grow our subscribers and our subscription revenue; ultimately, that’s going to come down to the bottom line when we get to a decent level.  The costs then become a lesser part and you’ll see an improvement in margins there.

ALEC HOGG:   You have a good margin – 21 percent.  How much higher can it go?

MEGAN PIDIGADU:  We believe we can get it high through driving our subscription revenue and through efficiencies in the business.

ALEC HOGG:   How much…could you double it?

MEGAN PIDIGADU:  We think that from an adjusted EBITDA perspective we could probably get into 30 percent.

ALEC HOGG:   That will make a big difference on the bottom line.

MEGAN PIDIGADU:  Yes.

ALEC HOGG:   You did mention that you added 24 000, so it’s five percent growth on your base in a quarter.  That’s pretty good going.  How many of those are coming from the global market?

MEGAN PIDIGADU:  I would say…in terms of that, it’s probably about 40 percent split, coming from the global market, so we are seeing good growth there as well.

ALEC HOGG:   It’s a nice story.

GUGULETHU MFUPHI: It is – very.  I want to go to Stellenbosch to see how they bring everything together.

ALEC HOGG:   Well, 90 developers…you can go anywhere: go into our newsroom and look at people sitting behind computer screens.  Isn’t it the same, or are they wackier there?  Do they have table-tennis tables, like we do?

MEGAN PIDIGADU:  No, we do try being like the Google-type of environment with our developers and allow free – thinking etcetera.  It is a very nice environment to be working in.

ALEC HOGG:   But do you give them 20 percent of their time to do their own thing as Google does?

MEGAN PIDIGADU:  No, we make sure they develop for the company.

ALEC HOGG:   Thanks, Megan.