Karooooo: An Overlooked GARP Gem

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Karooooo Ltd. is a SaaS mobility company with promising growth attributes, driven by its Cartrack and Logistics services.Despite a Q2 revenue miss, Karooooo's subscription revenue grew by 17%, and its...

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Moreover, key valuation metrics point to a GARP opportunity.   Martin Barraud/OJO Images via Getty Images This article emphasizes Karooooo Ltd. (NASDAQ:KARO) as we assess an overlooked asset with growth-at-a-reasonable-price attributes. For those unaware, Karooooo is a global mobility company that offers software-as-a-service. The company has experienced numerous material events lately, ranging from a second-quarter earnings release to insider stock sales amendments and a volatile stock price, providing us with the necessary latitude to assess its stock. Without further ado, here's our take on Karooooo's prospects. Structure And Key Value Drivers Business Structure Karooooo offers two major products: Cartrack and Logistical Services. The former is a security management system that tracks vehicles to ensure safety and recoverability, whereas the latter extends beyond Cartrack to provide logistical management software. The following diagram dispenses the company's business line and geographic revenue mix. Karooooo's Cartrack is focused on South Africa's market, but yields revenue from other regions, such as APAC and EMEA nations.   Segmental Overview (Karooooo) The company's Cartrack offering delivers much higher profit margins than its logistics and Carzuka (soon to be closed) segments. However, the logistics segment remains at an early stage, whereas Cartrack is a mature business with a substantial presence, meaning a direct comparison might be misleading.   Segment Profitability in USD (Karooooo) In a nutshell, the company's core business and cash cow are Cartrack. Yet, we believe its logistics segment provides cross-sales synergies while delivering a new growth opportunity, especially through foreign market exposure. Value Drivers Karooooo has a few identifiable value drivers. Let's start with Cartrack's value drivers. The business line has shown comprehensive uptake through its subscription model, a sales method that we consider smoother than pure product sales. Being a South African, I can tell you that vehicle safety is a significant concern, as both light vehicles and trucks have suffered from rising hijackings. The region's safety issues place it in the World Population Review's top ten on index. Despite the negativity of crime, Karooooo's solutions add a positive effect by offering vehicle and fleet owners the necessary tools to protect themselves. Sure, the company profits from its offerings, but it is a win-win situation for it and its customers. Low unemployment rates, political corruption, and insufficient policing budgets mean demand for vehicle safety tools like Cartrack will likely grow until structural changes occur. Cartrack (Karooooo) Reverting to Karooooo's broad-based earnings shows that its logistics unit remains a work in progress. However, the segment has shown scintillating growth. Karooooo's logistics segment revenue increased by 40% year-over-year to R101 million (approximately $5.75 million). The segment's growth rate outpaced Cartrack's by 2.66x, showing its prospects as a catalyst for broad-based expansion. We think Karooooo's logistics segment has international growth prospects. Cartrack's growth is concentrated, primarily relying on unsafe operating environments, whereas the logistics segment suits any geographic environment. Moreover, the segment benefits from a lean operating model, allowing consumers to scale their operations without investing large sums of capital in internal assets. Herewith is an overview of Karooooo's logistics segment.   Logistics Segment (Karooooo) Reviewing Karooooo's Finances Q2 Earnings Results Karooooo released its second-quarter earnings report on October 15, revealing a GAAP earnings-per-share beat of one cent and a revenue miss of $853 900. The market reacted strongly, leading to a 15.6% drawdown in its American Depositary Receipts.   Logistics Segment (Seeking Alpha) Here's a snapshot of Karooooo in pre-market on October 16th.   Seeking Alpha Despite missing its revenue target, Karooooo's subscription revenue grew by 15% year-over-year to ZAR986 million (approximately $56.16 million), driven by a 17% increase in subscribers. In addition, Karooooo's earnings per share increased by a phenomenal 31% year-over-year, showing signs of margin expansion. The company maintained its guidance at the midpoint, and despite Karooooo's revenue miss, its real growth remains robust. Therefore, we believe investors have overreacted to its revenue miss. Balance Sheet and Cash Flows Karooooo's balance sheet has softened year-over-year. However, it maintains what we consider a solid debtor's days and notable bank deposits, allowing it to maintain its short-term liquidity.   Balance Sheet (Karooooo) The company's balance sheet is supported by free cash flow growth, which it achieved while realizing outflows from investing activities via an R316 million (about $17.94 million) investment in developing its South African central office.   Cash Flows (Karooooo) We think Karooooo remains in good standing, allowing it to reinvest in its business and deliver dividends to its shareholders. Recent News Karooooo Refrains From Secondary Offering Jose Calisto, Karooooo’s CEO, triggered an announced secondary offering in July, allowing the sale of shares worth $75 million in gross proceeds. To our knowledge, Karooooo wouldn't have raised capital through the sale. Instead, it was merely a shareholder seeking divestment. As you might've gathered, the secondary offer was canceled as the selling shareholder deemed the sale unfavorable. However, this doesn't discount a future sale, as the selling shareholder cited market conditions. We believe a sale of this magnitude might be executed at a discount, dragging Karooooo's stock price downward. Nevertheless, the CEO's unwillingness to sell might be interpreted as a positive from a company performance standpoint (Karooooo's shares jumped by 7.6% after the announcement). Wall Street Price Targets Karooooo received three ratings from Wall Street in the past 90 days. Seeking Alpha's database shows that the stock maintains two buy and one strong buy ratings, with an average price target of $43.58 per share. Although Wall Street ratings can be inaccurate, they often provide positive sentiment-based support as various market participants \"buy into\" Wall Street's research.   Recorded Wall Street Price Target (Seeking Alpha) Valuation and Dividend Metrics A table outlining some of Karooooo's key price multiples is shown below; a discussion follows.   Metric Value   PEG 0.72x   EV/EBITDA 12.26x   Price-to-Cash Flow 15.36x   Click to enlarge Source: Seeking Alpha The stock's price-to-earnings-growth multiple sits below one, suggesting Karooooo's earnings-per-share growth has outpaced its stock price momentum. This observation is particularly important as the stock's non-GAAP price-to-earnings ratio of 25.4x is 9.34% above its five-year average and 5.18% above the sector median. Furthermore, Karooooo has an EV/EBITDA ratio of 12.26, which is below the sector median of 19.32x. Although the metric is 9.08% above Karooooo's five-year average, the company's rapid growth and margin expansion likely justify an inflated ratio. Karooooo's price-to-cash flow ratio of 15.36x is below the sector median of 19.65x. Like its EV/EBITDA, Karooooo's P/CF ratio exceeds its five-year average (by 9.08%). As previously shown, the company's cash flows decreased in Q2. However, much of the slowdown can be attributed to an investing outflow. Finally, Karooooo has a three-year dividend yield on cost of 3.27% and a four-year average dividend yield of 1.84%. We find Karooooo's dividend highly compelling for a growth phase stock.   Dividend Metrics (Seeking Alpha) Risk Factors Concentration Risk Karooooo has numerous identifiable risks. Having said that, we consider its primary risk to be operational concentration. The company's excess exposure to South Africa may introduce cyclicality, as much of Karooooo's revenue mix relies on a single economy. Although it is common for companies to operate in single economies, South Africa is a struggling economy with cyclical attributes. As such, we deem concentration risk a potential overhang. Some Valuation Metrics Are Questionable A few price multiples were dispensed in the previous section. We remain bullish about Karooooo's fundamental valuation outlook. Still, some of its price multiples are above their normalized averages (five-year averages). Although the company's growth might justify such valuations, some investors might see things differently, especially as its stock is above its 50-, 100-, and 200-day moving averages.   Momentum Indicators (Seeking Alpha) Closing Thoughts Karooooo's second-quarter revenue miss spooked the market. However, its headline growth remains exponential, suggesting market participants have overreacted. Despite likely facing concentration risk and normalized valuation inefficiencies, the company's price-to-earnings ratio conveys Karooooo's fundamental stealth, which derives from noteworthy representation in overlooked SaaS mobility markets.  We think Karooooo is a strong buy.","kind":"highlight","is_publish_news":true,"is_publish_highlight":false,"is_publish_live":false,"is_publish_wemedia":null,"editions":null,"column":"","sentiment":"0","news_tag":"analysis","news_rank":0,"symbols":[],"gpt_button":1},"commentList":[],"isCommentEnd":true,"newsSizeData":{"likeSize":0,"commentSize":0,"repostSize":0,"favoriteSize":0,"likeStatus":false,"favoriteStatus":false},"APP":{"userAgent":"Mozilla/5.0 AppleWebKit/537.36 (KHTML, like Gecko; compatible; ClaudeBot/1.0; +claudebot@anthropic.com)","isDev":false,"isTTM":true,"deviceId":"web-server-community-laohu8-v3","version":"4.29.3","shortVersion":"4.29.3","platform":"web","vendor":"web","appName":"ttm","isIOS":false,"isAndroid":false,"isTiger":false,"isTHS":false,"isWeiXin":false,"isWeiXinMini":false,"isWeiBo":false,"isQQ":false,"isBaiduSwan":false,"isBaiduBox":false,"isDingTalk":false,"isToutiao":false,"isOnePlus":false,"isHuaWei":false,"isXiaomi":false,"isXiaomiWebView":false,"isOppo":false,"isVivo":false,"isSamsung":false,"isMobile":false},"href":"/m/news/2476257180"}