Expansion Into Southeast Asia And AI Solutions Will Strengthen Future Market Position

Key Takeaways

• Aggressive investment in Southeast Asia and Europe aims to capture market share, boosting subscription revenue and earnings per share.
  
• AI-driven solutions and SaaS platform innovation differentiate Karooooo in fleet management, likely increasing market share and profitability.
  
• Expansion in Southeast Asia and logistics sector growth pose profitability challenges, with currency fluctuations and upfront costs affecting short-term financials.

Catalysts

Provides mobility software-as-a-service (SaaS) platform for connected vehicles in South Africa, rest of Africa, Europe, the Asia-Pacific, the Middle East, and the United States.

• Karooooo is ramping up investment in sales and marketing in Southeast Asia, which they regard as the most compelling growth opportunity over the medium to long term. The increase in presence in this region is expected to drive subscription revenue growth, impacting future earnings positively.
  
• The expansion and strategic investment in Cartrack's new central office in South Africa are expected to bolster operational capacity and support higher levels of organic growth, likely enhancing revenue and operating profit margins.
  
• Karooooo Logistics, despite being a lower-margin business, is experiencing robust revenue growth which is set to continue. This segment strategically supports customer retention, indicating potential future increases in overall revenue from the elevated customer base.
  
• Continued innovation with AI-driven solutions and a comprehensive SaaS platform offers differentiation in fleet management, positioning Karooooo to capture market share from competitors with basic solutions. This could lead to higher revenue and net margins as customers seek advanced operational insights.
  
• Plans to increase the global sales and marketing workforce significantly, particularly in Asia and Europe, suggest an aggressive approach to capturing market share, which could drive revenue growth and improve earnings per share as new customer acquisitions bolster subscription revenues.

Karooooo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Karooooo's revenue will grow by 13.1% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 19.9% today to 18.4% in 3 years time.
• Analysts expect earnings to reach ZAR 1.2 billion (and earnings per share of ZAR 37.6) by about January 2028, up from ZAR 881.1 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 27.5x on those 2028 earnings, down from 30.6x today. This future PE is lower than the current PE for the US Software industry at 43.6x.
• Analysts expect the number of shares outstanding to grow by 0.53% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.0%, as per the Simply Wall St company report.

Karooooo Future Earnings Per Share Growth

Risks

• The structurally lower-margin business of Karooooo Logistics could impact overall net margins and profits, especially as this segment grows in proportion to the higher-margin Cartrack business.
  
• The company's expansion efforts, particularly into Southeast Asia, come with inherent execution risks that could affect revenue growth if market entry isn't successful or competitive dynamics shift.
  
• While the company focuses on organic growth and disciplined capital allocation, its decision to prioritize market liquidity over share repurchases could be seen as a drawback for investors seeking direct capital returns, potentially impacting shareholder earnings.
  
• The need to significantly increase the sales and marketing workforce—by up to 70% in parts of Asia—implies substantial upfront costs, potentially affecting short-term operating profits while these expansions pay off.
  
• Currency fluctuations, particularly the strength of the South African rand, may negatively impact subscription and ARR from international operations, thereby affecting overall revenues.

Valuation

• The analysts have a consensus price target of ZAR45.75 for Karooooo 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 ZAR51.11, and the most bearish reporting a price target of just ZAR40.4.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ZAR6.4 billion, earnings will come to ZAR1.2 billion, and it would be trading on a PE ratio of 27.5x, assuming you use a discount rate of 7.0%.
• Given the current share price of ZAR46.72, the analyst's price target of ZAR45.75 is 2.1% 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.