Universal Road Charging And Telematics Expansion Will Shape A Cautious But Stable Outlook

Catalysts

About EROAD

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

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

• Although New Zealand’s move toward universal electronic road user charging gives EROAD a clear role in a critical national payment system, the timing and detailed design of the scheme are still being worked through by government. This could delay or limit the revenue uplift that usage based charging might bring.
• While free cash flow of $6.2 million reported and $16.7 million on a normalized basis provides a solid funding base for growth projects, higher operating costs, lower R&D capitalization and the need to scale platforms for high volume consumer use could compress net margins if spending runs ahead of confirmed eRUC revenue.
• Although the Australian business is signing large multi year enterprise agreements such as the $5 million ARR Cleanaway contract, the need to build inventory of around $2 million and ramp service capacity for complex deployments may weigh on near term earnings before the full ARR contribution flows through.
• Despite EROAD’s early role in usage based charging pilots in the U.S. and participation in international discussions, slower economic conditions, increased competition and the loss of a large North American customer highlight that any future mileage charging opportunities offshore could be harder to convert into sustained ARR growth.
• While governments in New Zealand and Australia are publicly seeking alternatives to declining fuel tax as EV uptake rises, policy decisions on pricing models, partner structures and capital intensity for nationwide systems remain uncertain. This could influence long run revenue quality and the balance between ARR growth and free cash flow.

Assumptions

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

• The bearish analysts are assuming EROAD's revenue will grow by 3.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from -71.5% today to 6.3% in 3 years time.
• The bearish analysts expect earnings to reach NZ$13.6 million (and earnings per share of NZ$0.11) by about January 2029, up from NZ$-141.3 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NZ$26.7 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 21.2x on those 2029 earnings, up from -1.7x today. This future PE is lower than the current PE for the NZ Electronic industry at 204.6x.
• The bearish 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?

• New Zealand’s move toward universal electronic road user charging, with legislation work scheduled through 2025 and implementation targeted for 2027, could expand EROAD’s addressable market beyond the current 4.7 million vehicles. This may support higher revenue and earnings than implied by a flat share price view.
• The Australian business is reporting double digit ARR growth, a $5 million ARR Cleanaway contract with fixed annual escalators and a track record of wins with large fleets such as Boral, Woolworths and Downer. This could support stronger long term revenue and free cash flow than a stagnant share price would suggest.
• Consistent positive free cash flow over four halves, liquidity of $62.3 million and ongoing debt repayments indicate financial flexibility that could be used for growth projects or further cost leverage. This may potentially improve net margins and long term earnings.
• EROAD’s role in collecting around $946 million in annual RUC for the New Zealand government and its participation in usage based charging pilots in larger markets such as the United States create optionality for new services. This could support higher ARR and earnings if more jurisdictions adopt similar models.
• Customer led R&D of $19 million, focused on platform scaling and features that helped secure the Cleanaway deal, together with the Manila office ramp up to support large enterprise rollouts, could reduce unit costs over time. This may support higher operating margins and earnings than implied by an expectation that the share price does not move.

Valuation

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

• The assumed bearish price target for EROAD is NZ$1.2, which represents up to two standard deviations below the consensus price target of NZ$2.0. 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 more bearish 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$1.2.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2029, revenues will be NZ$216.1 million, earnings will come to NZ$13.6 million, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 8.7%.
  
• Given the current share price of NZ$1.28, the analyst price target of NZ$1.2 is 6.7% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.