On Markets & Investing

Monthly Stock Idea Lab (MSIL #14) - May 2024 [PREMIUM]

28 May 2024



Ituran is a $531mn market company listed on NASDAQ that provides telematics services for cars. It is covered by just two research analysts, which makes it particularly exciting. There are no easily available consensus estimates, which makes it even better, as it is harder to spot the company using basic screening.

Ituran is just a very good company that ticks all the boxes, which is quite rare. A combination of strong and profitable growth, high cash returns to shareholders, strong insider ownership and alignment of interests, net cash position, and attractive valuation makes it quite unique. Moreover, there is also a hidden asset on the company’s balance sheet with a zero book value and a transaction-based valuation of $172mn (32% of the market cap).

The single issue I see is the highly competitive nature of the industry (car telematics). The other issue is that half of the sales come from Israel, where there is limited growth due to an already high market share and additional short-term headwinds.

Brief history

The company was founded in 1994 as a subsidiary of the Israeli conglomerate Tadiran. Its goal was to develop and operate a service for locating stolen vehicles using technology originally developed in the US for military use.

In 1995, a group of local investors headed by Izzy Sheratzky bought out Ituran from Tadiran. The company went public on the Tel Aviv Stock Exchange in 1998 and on NASDAQ in 2005. Its NASDAQ IPO price was $13 per share, and the company raised $62mn by issuing 4.8mn new shares.

Ituran was predominantly an Israeli-focused business until the early 2000s, when it expanded into Brazil, Argentina and the US. The earliest financial data available goes back to 2002. Back then, Ituran generated revenue of $49.7mn and an operating profit of $4.3mn (8.7% operating margin). By 2004, its revenue had increased 57% to $77.9mn, while EBIT was 4.3x higher at $18.3mn (23.5% margin).

Almost from the start, the company sold hardware tracking devices and tracking services on a subscription basis. The latter has been the majority source of revenue (60-75%).

Founder-led business

Izzy Sheratzky (currently 77 years old) is the largest shareholder of the company, with a 20.5% stake (through his company, Moked). He serves as the president and a director having resigned from the previous role as chairman.

Two of his sons, Eyal and Nir Sheratzky, are currently co-CEOs of Ituran, while his brother, Efraim Sheratzky, is a board member. Both co-CEOs have been with the company since it was founded.

The third son, Gil Sheratsky, is also a director of Ituran and a senior executive in charge of business development.

Yehuda Kahane is the second co-founder of Ituran and a board member since 1995. He holds a 7.1% stake. Mr Kahane has been focusing on the insurance sector, venture investing and academia.

Business today

The company provides its telematics services focusing on three core segments: stolen car recovery, fleet management, and connected car solutions. Management does not provide revenue contributions for each segment. Its customers include private consumers, car rental or sharing companies, OEMs who pre-install its software, and finance and insurance companies.

Over 70% of sales are recurring subscription-based revenue, with the remainder coming from sales of hardware devices.

Ituran has 2.25mn subscribers, of which 1.8mn are after-market customers (who installed the device after purchasing the car), while 430k subscribers are OEMs. Since 2004, Ituran has increased its after-market subscriber base by 11% organically.
Management has diversified the company’s revenue, with no customer accounting for over 10% of sales.

Israel accounts for about half of all sales, and this share has been consistent for the past 10 years. Brazil's share has moderately declined (from 33% in 2015 to 27% by 2023), while other countries (Mexico, Japan, the US, and Argentina) have increased.
New car sales froze in Israel after the war outbreak on October 7, but only for a short time, and they have since recovered. The company should benefit from operating leverage as its IT infrastructure supports services to a growing customer base. In the near term, the benefits of operating leverage have been muted as the company has been providing more tailored solutions to specific customers investing in R&D, while in other cases, the company financed the purchase of hardware as part of customer contracts.

The company sees strong growth in Latin America as car thefts remain high. Besides, financial companies in the region are increasingly interested in Ituran’s products to improve their client offerings.

The total headcount has been broadly flat over the past three years, which is quite encouraging and indicates the operating leverage potential of the business.
In short, Ituran is an asset-light business with over 70% of its revenue coming from subscriptions. It has experienced short-term headwinds related to the situation in Israel as well as the devaluation of the Argentinian peso.

Financials and Valuation

Over the past ten years, the company has achieved a solid 7% sales growth in USD terms (10-year CAGR) with only two years of declining revenue (one of them was the pandemic 2020 year). It is a pretty good result considering the highly competitive nature of the sector. Moreover, with almost half of sales coming from Latin America, Ituran’s sales were negatively affected by the weakening of local currencies (especially the Argentinian peso).

In addition, Ituran has been profitable and has generated positive FCF for more than ten years. It has generated an average operating margin of 22% and a net margin of 14%.
Ituran runs a capital-light business model which requires minimum investments into fixed assets, generating over 20% ROIC in the past ten years.
With over 70% of revenue coming from subscriptions, Ituran benefits from positive working capital as it receives money upfront but recognises revenue over time. This understates its earnings in the P&L statement.

The company has had a ten-year average cash conversion (FCF/Net income) ratio of 153%.
It has accumulated a net cash position of $53mn (10% of the market cap).

The company has not used shares as a source of funding, which is quite encouraging. Moreover, management initiated a $25mn buyback programme in 2019 and increased it by $10mn in February 2023.

During 2023, Ituran bought back $6.6mn worth of shares with another $6.7mn remaining under the buyback program (as of 31 December 2023).

In addition to that, Ituran has been a regular dividend payer. It distributed a $0.8-0.96 dividend per share during 2013-2019 but cut its dividend in half in 2020. The dividend recovered back to $0.93 in 2022 and 2023. In February, with the announcement of full-year results, the company also declared an increase in quarterly dividend of $8mn ($0.34/share) from $5mn in the prior quarter and from $3mn in the 8 quarters prior to that. Cumulative 2023 dividends amounted to $19mn (4% yield), and the latest dividend implies an annualised yield of 6%.

The dividend capacity is almost 3x higher, on my estimates.

Management conservatively expects $90-95mn EBITDA in 2024 and over $100mn EBITDA next year. With an EV of $478mn, this puts Ituran on c. 4.8x and c. 9x P/E (or 8x adjusted for the net cash position).

Finally, a point on hidden assets. From 2013 to 2015, Ituran backed up a start-up, Bringg, which was building a delivery management platform. Bringg has since raised $180mn of new capital from other investors and received the latest valuation of $1bn, although that was in 2021. Ituran’s original stake was diluted to 17%, but its value has increased from $3.4mn to $170mn.

Ituran also owns a 50% interest in the JV with a leading Indian auto supplier, Lumax. The balance sheet value of this stake is $0.56mn.

Ituran has small stakes in a few other companies mostly at the start-up phase with less than $1mn book value.

Analysts always put a price target in their reports. I do not think there is a specific number we should focus on, especially since things change. But a business with a 20% ROIC, growing at 5-10% a year and distributing c. $40mn to shareholders, could be worth at least $500-600mn (assuming c. 6-7% shareholder yield). If we add back the $53mn net cash and assume at least half of the value of their 17% interest in Bringg ($85mn), then the company's fair value should be closer to $700mn ($35/share).

If the company is able to demonstrate its unique position in telematics and gain market share outside of Israel, then the yield that shareholders would expect could be below 5% (closer to valuation of more established tech platforms). This would imply a price of over $47 per share.

Risks and issues

The company is a dominant player in Israel which accounts for almost half of all the revenue. The growth potential there is limited and the business is facing short-term risks in the country.

The telematics industry is highly competitive, with many players offering alternative products. I am not quite sure the business can stay competitive over the long ter. It may be forced to increase spending on R&D or acquire new businesses which could reduce its returns profile.

The founders of the business are over 70 years old. The company is run by the sons of the co-founder, so arguably no major succession risk. However, there is still uncertainty as to how the business would look like after the co-founders are no longer actively involved.

I also noticed that the total compensation of the key executives was $11.6mn in 2023. While not high in absolute terms, it is still meaningful relative to the company’s size (c. 2% of the current market cap). Besides, all compensation was in cash and apart from the co-founder and president, Izzy Sheratsky, senior executives do not have direct reported ownership in the company.

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