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!