Quartix Holdings (QTX)
Quartix: Love at first sight
Quartix, a manufacturer of vehicle tracking devices, is a lovely company.
I’ve been lured into looking at Quartix, a company I’d overlooked because it listed just over a year ago. New listings often have short track records that make them difficult to evaluate, and canny owners have a nasty tendency to list when their companies are performing well and likely to be most attractive to investors. More often than not they subsequently disappoint.
That couldn’t be said of Quartix though. It listed in November and the share price has almost tripled. If I need it, I can probably get Quartix’s accounts back until 2001 when it was founded through Company’s House. A couple of weeks ago an investor I respect messaged me:
…not sure if you’ve ever looked at Quartix, but I saw their AGM was next month at their HQ in Cambridge [my home town] and thought of you. It is a great business and an excellent management team. Genuinely good and honest people, conservative accounting, very cash generative, run for the long-term etc. etc. One can have a discussion about valuation, but I think you’d find it interesting.
First impressions: he’s right on every count. He might also have mentioned that managing director Andy Walters founded the company in 2001 and still controls it through his 37% shareholding. I find that reassuring*.
In full-year results to December 2015 Quartix raised revenue 28% to nearly £20m and adjusted profit 30% to nearly £5m compared to the previous full-year. The company earned even more in cash terms than it did in accounting profit and despite a policy of returning 50% of cash flow, the company is planning special dividends whenever its cash balance exceeds £2m. Return on capital in 2015 was 303%! It’s a dubious figure** but it’s safe to say that Quartix was highly profitable in 2015.
The company makes vehicle tracking systems. It rents them to small and medium sized business that operate fleets of commercial vehicles on predominantly twelve month contracts. About a third of revenue comes from sales to the insurance industry, currently via one customer, Wunelli, which sells units to insurers. Once installed by Quartix, tracking systems allow insurance companies to charge young customers lower insurance premiums if they drive safely. They allow fleet managers to check their fleets are in the right place, at the right time, and ensure their drivers drive safely and maximise fuel efficiency. They also provide braking and g-force data to help in determining insurance claims after crashes. As the technology evolves, the feature sets increase.
Subscriptions in the UK increased 16% in 2015 and the company’s much smaller operations in France, where it is profitable, and the USA, where it has operated for just over a year, grew faster. The company sold 74% more devices to Wunelli, although revenue grew 56% due to previously agreed price reductions. Though the insurance business is newer and appears to be growing faster, Quartix’s primary objective is to grow the fleet business, saying the revenues from insurance give it economies of scale. Presumably fleet sales are more profitable. They’re also more enduring, because the vast majority of subscriptions are renewed.
The company claims its rental model is more attractive to customers than requiring upfront payment like some of its rivals, and it believes it has a better product. It’s in demand, a 23.4% overall increase in Quartix’s installed base in 2015 is higher than the industry growth rate of fleet management systems in active use (16%) quoted in Quartix’s admission document. That said, the fleet subscription base of 73,744 units is smaller than all seven international competitors listed in the admissions document. Many of them operate in the USA though, a gigantic market Quartix has only just entered.
A share price of 390p values the enterprise at £185m or about 38 times adjusted profit. The earnings yield is 3%.
You know where I’m going with this. My correspondent predicted my reaction. There are risks, Quartix may not be as successful abroad and it will not be as successful in recessions when small businesses are going bust, but it’s a focused, potentially differentiated, uncomplicated business. It’s love at first sight.
The valuation is out of my league, though. Quartix would have to be earning twice as much to interest me at the current share price. That’s not to say that Quartix couldn’t quite quickly grow into the valuation, just to say that I wouldn’t take that growth for granted.
Maybe I’ll pop along to the AGM, if they’ll have me.
*While some investors find controlling interests stifling, it’s difficult to get rid of management or influence them if they are the biggest shareholder, more often than not I find owner-managers have a long-term focus on growing the business that accords with my own.
**The return on capital figure is somewhat meaningless as Quartix recognises very little capital on its balance sheet except the value of goodwill capitalised in 2008. Goodwill is the difference between the net asset value of an acquisition and the price paid to acquire it. In assessing the profitability of a business it’s necessary to compare what it earns (profit) to how much it costs to fund the business (operating capital). Goodwill is an historical cost (the business won’t have to be re-acquired), not an ongoing funding requirement so I ignore it.
A relatively big numerator (return(profit)) divided by very small denominator (capital) equals an outlandish quotient (answer). It’s also unreliable in that small movements in the denominator from year to year will produce apparently big changes in profitability.
About the author
Richard is companies editor of Interactive Investor and a columnist at Money Observer magazine. A keen private investor through his Self Invested Personal Pension, he manages two virtual portfolios. The Share Sleuth portfolio is a hand-picked collection of mostly small-cap value shares, while the Nifty Thrifty is a mechanical portfolio designed to pick large, successful companies at cheap prices.
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