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DBS: Karooooo Ltd = Buy Target Price US$39.00

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3Q24 adj EBITDA beat consensus on margin surprise

3Q24 adj EBITDA of ZAR428m (+3.5% q-o-q, +28% y-o-y) was 11% above consensus, on margin surprise and revenue beat in Carzuka and Karooooo Logistics. In 3Q24 (Feb YE), Karooooo Ltd (KARO) reported adj EBITDA of ZAR428m (+3.5% q-o-q, +28% y-o-y), ~11% above consensus estimates of ZAR384m, on margin surprise, which saw KARO’s adj EBITDA margin at 39.6% in 3Q24 vs consensus estimate of 37.0%. There was also a revenue beat in Carzuka and Karooooo Logistics segments (~29% above consensus projection). KARO’s adj EBITDA rising by 3.5% q-o-q was led by (i) 3.8% q-o-q increase in revenue (ii) decrease in S&M expenses by 2.3% q-o-q, and (iii) decrease in R&D expenses by 4.2% q-o-q. Cartrack, the main profit driver of KARO reported adj EBITDA of ZAR447m (+7.2% q-o-q, +29% y-o-y) in 3Q24 and Cartrack’s adj EBITDA margin improved from 47.2% in 2Q24 to 48.6% in 3Q24. Cartrack’s G&A expenses was down 2.7% q-o-q and R&D expenses was down 3.8% q-o-q, supporting the margin improvement. Karooooo Logistics reported adj EBITDA of ZAR7.9m (-2.9% q-o-q, +208% y-o-y) and adj EBITDA margin declined to 8.7% in 3Q24 (11.3% in 2Q24) as KARO continues to scale its logistics operations. Karooooo Logistics operating profit (EBIT) margin was 8.1% in 3Q24 (10.6% in 2Q24), still above the long-term projected EBIT margin target of 5-6%. KARO seeks to integrate the logistics stack into KARO’s platform to offer delivery services using a single platform (shifting from Delivery-as-a-Service to Software-as-a-Service) enabling scalability and profitability. Improvement in Cartrack and Karooooo Logistics profitability is expected to be the key driver of KARO’s share price, in our view. Meanwhile, Carzuka’s adj EBITDA losses worsened to (ZAR27m) in 3Q24 compared to (ZAR12m) in 2Q24, and its negative adj EBITDA margin was (38.3%) in 3Q24 vs (13.9%) in 2Q24, due to provisioning in 3Q24 for Carzuka’s reduced operations. Carzuka reduced its operation as a third-party vehicle trading platform since 3Q24, and adequate provisions were made. KARO expects Carzuka to have a minimal impact on KARO’s operating profit and adjusted EBITDA going forward. KARO reported 3Q24 revenue of ZAR1,080m (+3.8% q-o-q, +16% y-o-y), ~4% above consensus, on revenue beat in Carzuka and Karooooo Logistics. Cartrack which contributes 85% to the total revenue reported revenue of ZAR919m (+4.0% q-o-q, +14% y-o-y), on robust subscriber addition. Cartrack added 75.5k subscribers in 3Q24 reaching 1.91m (+4.1% q-o-q, +14% y-o-y) compared to 75.3k addition in 2Q24. The net additions were mainly from South Africa and Asia Pacific (APAC). Southeast Asia is gaining good traction since opening up in 1Q23, being the second largest revenue contributor as of 3Q24. Carzuka posted revenue of ZAR70.5m (-17.8% q-o-q, -2% y-o-y) compared to consensus expectations of ZAR50.0m. The q-o-q decline in revenue was due to the reduced operations as a third-party vehicle trading platform. Karooooo Logistics has been highly scalable and is delivering solid growth posting revenue of ZAR90.6m (+26% q-o-q, +67% y-o-y) in 3Q24, compared to consensus expectation of ZAR75.3m.

KARO’s FY24F guidance remains unchanged, and continues to be inline with consensus projections. KARO strongly sticks to its guidance for FY24F given during 4Q23. KARO expects to record ZAR3,400m – ZAR3,600m for Cartrack’s subscription revenue, where the mid-point guidance is inline with consensus. Meanwhile KARO’s Operations Cloud, currently drives the digital transformation for more than 113,000 commercial clients. According to KARO, implementations boast a 95% retention rate among businesses of different sizes, spanning diverse geographical markets and industries such as logistics, field service maintenance, transport, finance, mining, agriculture, and emergency services. 

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