Universal Road User Charging Will Drive Long-Term Upside For This Telematics Provider

Catalysts

About EROAD

EROAD provides connected telematics, compliance and electronic road user charging technology for commercial and passenger vehicle fleets.

What are the underlying business or industry changes driving this perspective?

• New Zealand's move toward universal electronic road user charging for all vehicles, with implementation targeted from 2027, positions EROAD to leverage its existing role in collecting close to one billion dollars of road user charges annually. This supports structurally higher recurring revenue and long term earnings growth.
• Global policy shifts away from fuel excise toward usage based funding models in larger markets such as Australia and the United States, where governments are actively exploring distance based charging, create a scalable template for EROAD to replicate its New Zealand platform and expand its addressable market. This drives medium term revenue and EBITDA upside.
• Accelerating adoption of safety, compliance and AI enabled camera solutions by large enterprise fleets, as evidenced by the Cleanaway contract and wins with major Australian corporates, supports continued ARPU expansion and higher margin software revenue. This should lift net margins over time.
• Completion of the 4G upgrade program and ramp up of lower cost engineering and support capability in Manila reduce capital drag and unit service costs, improving operating leverage and allowing a greater share of incremental revenue to translate into free cash flow and earnings.
• Refocusing growth investment on Australia and New Zealand, where enterprise ARR is growing strongly and retention is above 90 percent, while preserving capability but limiting spend in a softer North American market, should improve consolidated return on capital and support more predictable free cash flow and EBIT growth.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming EROAD's revenue will grow by 4.4% annually over the next 3 years.
• Analysts assume that profit margins will increase from -71.5% today to 6.6% in 3 years time.
• Analysts expect earnings to reach NZ$14.8 million (and earnings per share of NZ$0.08) by about December 2028, up from NZ$-141.3 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting NZ$25.1 million in earnings, and the most bearish expecting NZ$12.8 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 35.4x on those 2028 earnings, up from -1.5x today. This future PE is lower than the current PE for the NZ Electronic industry at 113.6x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.73%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• New Zealand's universal electronic road user charging program may be delayed, scaled back or structured in a way that limits EROAD's role or pricing power. This would undermine expectations for a large step change in eRUC adoption and constrain long term revenue growth and earnings expansion.
• Structural weakness in North American freight markets and heightened competition could persist for longer than anticipated, leading to continued unit churn, further customer nonrenewals and underutilised capability. This would pressure regional revenue, group EBITDA and overall net margins.
• EROAD's strategy of investing heavily in eRUC readiness, platform scaling and customer led innovation may not translate into sufficient new contracts or pricing uplift. This could result in elevated R&D and operating costs without commensurate ARR growth, thereby compressing operating leverage and dampening earnings.
• Macroeconomic headwinds in key markets, such as customers permanently running smaller fleets or delaying telematics upgrades, could structurally reduce the addressable base and slow ARPU expansion. This would cap subscription revenue growth and limit improvement in free cash flow.
• The large impairment of North American goodwill highlights the risk that further adverse shifts in regional demand, regulatory models or technology adoption could force additional write downs or restructuring. This would weigh on reported earnings and may restrict capital available for growth investments in higher return regions.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of NZ$2.17 for EROAD based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$2.8, and the most bearish reporting a price target of just NZ$1.55.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be NZ$224.9 million, earnings will come to NZ$14.8 million, and it would be trading on a PE ratio of 35.4x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of NZ$1.15, the analyst price target of NZ$2.17 is 47.1% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.