Electronic Road User Charging Shift Will Support A Stronger Long Term Outlook

Catalysts

About EROAD

EROAD provides electronic road user charging, telematics and safety solutions for commercial and light vehicle fleets across New Zealand, Australia and North America.

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

• New Zealand's planned transition of all 4.7 million vehicles to electronic road user charging by 2027, with EROAD already facilitating around $946 million of annual RUC collection, gives the company a credible pathway to tap a much larger addressable base. This could be supportive for recurring revenue growth over time.
• Global moves away from fuel tax towards usage based charging, including Australian federal and state level interest and active pilots in the United States, align directly with EROAD's core capability and may widen its opportunity set. This could be supportive for long term ARR and earnings.
• The Cleanaway agreement in Australia, a 5 year deal representing A$5 million of ARR once fully deployed with fixed annual escalators, together with wins at Boral, Woolworths, Programmed, Ventia and Downer, points to a growing enterprise footprint that can improve scale and potentially support EBITDA margins.
• Completion of the 4G upgrade program, which has temporarily weighed on reported EBIT and free cash flow, removes a major one off cash drain and clarifies the ongoing cash profile. This could allow a higher share of operating cash flow to support future earnings growth initiatives.
• Growing use of higher value services such as safety, compliance, AI cameras and cold chain monitoring, alongside strong ARPU levels in New Zealand and Australia, suggests a richer product mix that can improve unit economics and support net margins and recurring earnings.

Assumptions

This narrative explores a more optimistic perspective on EROAD compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts. How have these above catalysts been quantified?

• The bullish analysts are assuming EROAD's revenue will grow by 7.4% annually over the next 3 years.
• The bullish analysts assume that profit margins will increase from -71.5% today to 10.7% in 3 years time.
• The bullish analysts expect earnings to reach NZ$26.1 million (and earnings per share of NZ$0.12) by about January 2029, up from NZ$-141.3 million today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as NZ$13.3 million.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 25.8x on those 2029 earnings, up from -1.6x today. This future PE is lower than the current PE for the NZ Electronic industry at 128.1x.
• The bullish 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 8.71%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• North America remains soft, with annualized recurring revenue in the region at just under $70 million and down almost 6% in constant currency year on year, alongside the nonrenewal of a large U.S. customer and an impairment of $134.7 million on North American assets. This points to tougher long term conditions that could weigh on group revenue and future earnings.
• The eRUC opportunity in New Zealand and abroad depends on policy design, timing and commercial model decisions that are still being worked through. If government frameworks, revenue sharing or capital requirements are less favorable than expected, the long term contribution to ARR, free cash flow and net margins could fall short of bullish expectations.
• Customer unit counts in New Zealand have been affected by fleet reductions linked to challenging economic conditions. If freight and broader activity remain subdued or weaken again, ongoing fleet resizing could cap ARPU growth and limit ARR expansion, which would put pressure on revenue and earnings.
• Operating costs are 71% of revenue and have been affected by ramp up in the Manila office and higher service and support spending to handle large enterprise rollouts. If expected operating leverage does not come through as growth investments in Australia, New Zealand and eRUC scale, normalized EBIT and net margins may remain constrained.
• The business model is increasingly tied to large enterprise customers and big contracts such as Cleanaway, government fleets and potential eRUC arrangements. Any contract losses, slower rollouts, or pricing pressure in these larger accounts could create volatility in ARR and free cash flow as hardware, support and R&D costs are committed ahead of revenue.

Valuation

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

• The assumed bullish price target for EROAD is NZ$2.8, which represents up to two standard deviations above the consensus price target of NZ$2.17. This valuation is based on what can be assumed as the expectations of EROAD's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• 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 more bullish analyst cohort, you'd need to believe that by 2029, revenues will be NZ$244.6 million, earnings will come to NZ$26.1 million, and it would be trading on a PE ratio of 25.8x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of NZ$1.21, the analyst price target of NZ$2.8 is 56.8% 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.