I have a long position in Karooooo (i.e. I own the stock) that I initiated a couple of months before the big announcement came of a migration to the Nasdaq (back when it was called Cartrack).

Since then, the company has been growing revenue at solid rates but this hasn’t translated into profit growth, as the cost of acquiring a customer is high. It takes many months for Karooooo to achieve break-even on a new customer. In a period of high customer growth, this causes a decrease in profit margins.

The latest quarter does include a swearword in this economic model: churn. That’s not what I want to see. Customers need to come onto the platform and stay there for a few years, otherwise Karooooo loses money on new customers. The company attributes this to financial pressure on customers from the pandemic.

The latest financial update by the company is for the fourth quarter of the 2022 financial year. It includes the numbers for the full year as well.

By the end of February 2022, Karooooo had 1,525,872 subscribers vs. 1,306,000 a year prior. This is a 16.8% increase in subscriber numbers over 12 months. As noted above, the impact on margins is negative, with gross profit margin decreasing from 71% in FY21 to 68% in FY22. The company believes that gross margin can increase in FY23. I certainly hope it will!

For the year, operating profit in the Cartrack business increased by just 1% to R731 million. Growth initiatives Picup and Carzuka incurred operating losses of R3 million and R13 million respectively. The net result was a decrease in earnings per share of 3%. With once-offs removed, it would’ve increased by 1%.

In the last quarter of the year, total revenue increased by 20% year-on-year to R742 million. This is a similar growth rate to revenue for the full 2022 financial year.

The expectation for the 2023 financial year is subscriber numbers between 1.7 and 1.9 million, subscription revenue between R2.95 billion and R3.1 billion and adjusted EBITDA margin in Cartrack of between 45% and 50%.

The group has R718 million in cash after raising R349 million when it listed on the Nasdaq in April 2021. R70 million was used to acquire Picup in September 2021.

Free cash flow of R379 million in 2022 was down from R460 million in 2021. This puts the group on a lofty free cash flow multiple of around 40x, so growth needs to be maintained.

Disclaimer: The Finance Ghost holds shares in Karooooo