ERD - ERoad. (Transport sector technology)

[Te Whetu]

$360M cap @ $4.40

Just made $1M profit.

These guys have been at it for long enough now.

Beginning to look like a charity to their customers, another Rakon.

Bit old now but I am wondering what others thoughts are on EROAD's 26 November 2020 investor presentation.

At the time EROAD had made a $1m NPAT in the prior 6 months ended 30 September 2020. Since the announcement its market capitalisation has increased from $360m to $433m (+20%). For comparison, the change to the NZX50 index is approximately +6%.

I hold a decent amount of EROAD shares and given the sharp increase over the last 12 months I have been reviewing the company in case I should be selling. My first inclination was similar to Getty's, that the profit might not be sufficient and growth does not look to be fast enough to justify the current share price.

However, I wonder if NPAT, EBIT and EBITDA are not the best measures of earnings to use when considering EROAD. The company certainly seems to think it should be considered differently. Rather than one of those measures of earnings, EROAD seems to prefer a focus on 'free cash flow' (e.g. page 22 of its November 2020 investor presentation). I consider there is merit in this approach, particularly with all the estimation that is presumably required to prepare a P&L for a company like EROAD. Cash flow is much more tangible.

Going to the waterfall at page 22 of the investor presentation, EROAD (and presumably Alex Ball as its CFO) wants us to focus on the $4.7m free cash flow in the six months ended 30 September 2020, and then seems to want us to add back the $5.6m investing for future scalability. This would be added back on the basis that it could have been not incurred, while (presumably) not having this impact EROAD's other current earnings. Similarly, Australia currently has negative cashflow and could presumably be exited without impacting the cash flows in the other regions. Assuming that these investment costs are value enhancing (neither wasted nor needed for ongoing current earnings, but are instead for future growth), I consider it may be reasonable to add them back when undertaking my following analysis. Adding these amounts back results in 'adjusted' free cash flow of approximately $11m in the six months ended 30 September 2020. Doubling that gets you to approximately $22m 'annualised' free cash flow.

The term 'free cash flow', as referred to by EROAD, seems to be free cash flow to equity (being post interest and post cash paid tax). Therefore, it should be compared to EROAD's market capitalisation of $433m. This means EROAD has a market capitalisation of approximately 20x its annualised adjusted free cash flow.

This multiple does not seem particularly expensive for a company like EROAD, although I consider further growth (both as a result of the $5.6m investment and otherwise) is required to justify its current market capitalisation. However, based on past experience, it seems likely that EROAD will continue to experience growth. The important part will be that the growth is to free cash flow, rather than to just EBIT or EBITDA. Be suspicious if EROAD ever changes its focus from free cash flow to just EBIT or EBITDA!

I currently hold quite a bit of EROAD (>5% of entire share portfolio). Given this existing exposure, I don't plan to buy more. However, based on this multiple (which is unfortunately a little crude) I am also not inclined to sell at the present time (and would consider buying shares if I didn't already have a reasonable exposure).

What are others thoughts on EROAD? It hasn't had much chat on here for a while. It also seems to be flying under the radar as far as picks for 2021 – is this because people consider it to be overpriced or is it underappreciated?

Te

Disc: As above.

PS:
Getty's reference to Rakon is kind of funny, as Rakon's share price has rocketed up since 26 November 2020 – up 95% as at its closing price on Friday (albeit a bit down today as at the time I post this). I hope this is like Rakon!

[BlackPeter]

Well, yes - the short term trend looks really sexy, doesn't it?

Attachment 12216


And here is a secret - trends always continue in the direction we want them to go ... until they stop .

With companies like ERD it is better to look at the big picture:

Attachment 12217

Not so sexy anymore? ERD did burn already through lots of shareholder capital. Sometimes their story sounds comforting ... and often it does not.

Who is to say where they go from here, markets and politics are fickle and competition is strong. I recon the next spinner in the wheels is sort of overdue for them.

If you think that they offer the best road tax solution since the invention of sliced bread ... think again. Their solution is not rocket science. There are as well plenty of competitors on the market and some of them seem to have significantly more experience in e.g. fleet management as ERD as well as better customer reviews.

Anyway - I took them off my watchlist .... I found it over the years easier to lose money with them than make it. Not my type of investment :

[RupertBear]

Well, yes - the short term trend looks really sexy, doesn't it?

Attachment 12216


And here is a secret - trends always continue in the direction we want them to go ... until they stop .

With companies like ERD it is better to look at the big picture:

Attachment 12217

Not so sexy anymore? ERD did burn already through lots of shareholder capital. Sometimes their story sounds comforting ... and often it does not.

Who is to say where they go from here, markets and politics are fickle and competition is strong. I recon the next spinner in the wheels is sort of overdue for them.

If you think that they offer the best road tax solution since the invention of sliced bread ... think again. Their solution is not rocket science. There are as well plenty of competitors on the market and some of them seem to have significantly more experience in e.g. fleet management as ERD as well as better customer reviews.

Anyway - I took them off my watchlist .... I found it over the years easier to lose money with them than make it. Not my type of investment :

Well said BP

[Te Whetu]

Hi BP,

Yep, I tend to invest more on fundamentals rather than trends. The short term 'sexy' trend was more of a reason for me to sell than buy. Or more precisely a reason to check whether I should sell or hold.

I have held EROAD for a while now, through many of those ups and down. I originally acquired a reasonable shareholding in July/August 2016 at between $2.05 and $2.08. I then topped up my shareholding in the October 2020 rights issue at $3.90 – I took the maximum allowance of 44% (post-scaling).

Since then, on 29 December 2020, I sold 16.8% of the total shareholding at $4.90. I did this because, with the recent price increase combined with the rights issue, EROAD now represented a relatively large proportion of my total share portfolio for what was no longer a conviction shareholding. That sale was done without much fundamental analysis. The intention was to go back and look at the fundamentals and see whether I should sell more.

Having looked at the recent announcements etc, I am not convinced it is a sell – it looks like a hold or possibly a buy.

I can understand your scepticism with the company, it has certainly not lived up to the hype in the past. Still, it doesn't seem to be in a bad position if it can maintain and grow its current free cash flow. I also like what they did in that last investor presentation to help shareholders understand the value proposition.

I would be happy to sell if there's a good reason. Following my own analysis I came here looking to see if I had missed anything but was surprised about the relative lack of comments. As a rule I don't generally post much (I last posed in May 2019). I posted the above primarily to see if others had any contrary views and to see if I was missing anything by focusing on free cash flow.

Hope all is going well for you and all the best in 2021!

Te

[Rawz]

Bit of a shocker quarterly update on Friday. USA lost units which was a big big surprise.

Quarterly UnitsTotal at 30/09/2020 to 31/12/2020

New Zealand 84,526 to 85,597 INCREASE 1,071
North America 35,294 to 35,255 DECREASE -39
Australia 2,373 2,625 to INCREASE 252
Total Contracted Units 122,193 to 123,477 INCREASE 1,284

So qtr on qtr growth of 1%. USA loss blamed on COVID and political upheaval. Not sure about that.

Will be interesting to see how the shareprice tracks next week. Down 6% on friday. I don't hold but its on my watchlist.

[bullfrog]

With over 430,000 dead in the USA in one year and businesses struggling, not surprising that they lost a few. The test is next year, when the huge growth potential in the US needs to be realised.

The thing that does surprise me is the lack of units in Aus. It would be good to see some Corp uptake there, no COVID excuses in Aus.

Prob will see a little fall back in share price, but confident in their ability to win and service big Corp contacts (800 units due nxt mth), with a 95% retention.

Good post Te Whetu, agree with your sentiments, don’t think you’ve missed anything significant.

One of my largest holdings, and a steady, safe hold for me in this year of uncertainty.

[BlackPeter]

Bit of a shocker quarterly update on Friday. USA lost units which was a big big surprise.

Quarterly UnitsTotal at 30/09/2020 to 31/12/2020

New Zealand 84,526 to 85,597 INCREASE 1,071
North America 35,294 to 35,255 DECREASE -39
Australia 2,373 2,625 to INCREASE 252
Total Contracted Units 122,193 to 123,477 INCREASE 1,284

So qtr on qtr growth of 1%. USA loss blamed on COVID and political upheaval. Not sure about that.

Will be interesting to see how the shareprice tracks next week. Down 6% on friday. I don't hold but its on my watchlist.

Well, this announcement brought the SP clearly down from the stratosphere. Bouncing now along the MA200. Will be interesting, whether this holds.

Overall - no matter what people think about their technical solution ... ERD is in my books still not a cheap share with a forward PE of 77 combined with quite modest growth.

As well, based on personal past experience - they have been quite good and successful in the past in disappointing investors - several times.

I would be interested on which basis are people valuing this share to find for themselves a justification to buy or to hold.

[bullfrog]

I first bought shares in ERD in Nov 2016, Since then, my rate of return has been 15% pa, and that takes into account the recent 30% plunge in share price from 5.4 ish to 4.2, not spectacular but not too shabby IMO.

I look for sustainability of business, and ERD is one of the few tech companies that operates in the regulatory, compliance and H&S sectors. These sectors are not optional areas of a business, they are a requirement, and companies want to engage with a company that can manage these risks so that they can get on with making money. In other words, ERD supplies a necessary product. I note that they were designated as an essential service during COVID, and would be interested to know what % of their customers were also designated as an essential service.

ERD changed their business model to a subscription service, which makes sense if you can retain customers, and they have proven that they can do that with a 95% customer retention rate.

They obviously work at keeping their customers happy, and as their relationship develops, so does the opportunity to upsell their services, and this brings me to their investment in R&D. The currency of their tech is important, and I note that they have a policy of capitalising their R&D to the tune of $40m. Valuing an intangible asset such as R&D is highly subjective, but employing this strategy will probably reduce their tax bill, and makes sense to me.

Note 5 2020 AR shows $54m revenue, of which $25m is from the USA, or 35k units out of a total of 123k. So almost 30% of their units, and 46% of their revenue is coming from the USA, and we all know how big the USA market is. The fact that they seem to be making more money from the USA than NZ on each unit is a good sign.

As for online reviews posted on dubious sites by anon people, I’m not sure that this will form part of a credible tender process for corporate accounts. They’ll probably look at references from existing customers - did I mention the 95% retention rate.

So to sum up, they have a compelling elevator pitch, understandable business model and provide a credible solution in a highly regulated environment. A solid, medium growth company IMO, and that's why I've invested in them.

[Getty]

$5 today, up 6% on news that a deal has been done with a 4000 unit client.

Sounds good, BUT...

If they were installed tomorrow, instead of over many months, I'm assuming $10 a month net profit per unit, =$40000 pm, or $480K pa.

At $5, old PE is 160, so if this is their biggest customer, when will decent profits be made?

[Te Whetu]

$5 today, up 6% on news that a deal has been done with a 4000 unit client.

Sounds good, BUT...

If they were installed tomorrow, instead of over many months, I'm assuming $10 a month net profit per unit, =$40000 pm, or $480K pa.

At $5, old PE is 160, so if this is their biggest customer, when will decent profits be made?

It's their biggest Australian customer, not their biggest customer.

Over the course of this calendar year, I estimate this one customer will add $1.5m+ annualised revenue (2500 units at $50+ revenue per month). EROAD tends to make around 65% EBITDA margin on additional revenue (prior to corporate and development, which I would not anticipate to be materially impacted by this one customer). Therefore, I expect this customer will add around $1m to annualised EBITDA. There might be an increase in depreciation and amortisation, but I would not anticipate a major increase.

Once fully implemented, I expect this customer will take the Australian operations from net losses to net profits.

I'm quite interested in seeing the Q4 unit numbers, which will presumably be released later this month. The net loss of 39 units in North America in Q3 was a bad sign. Hopefully we'll find out if that was a one-off blip, with growth returning, or if it signalled the point where the North American operations began to stagnate or (worse) decline.