SECURITIES Vehicle Telematics Smart Connections - A New Roadmap? Q1 2015 Important Notice: The price of shares may change quickly and it may go down as well as up. You may not get back the full amount invested. Past performance is no guarantee of future success. This document should not be considered as advice or a personal recommendation to invest in any of the stocks mentioned. Investors should seek advice from their broker, or a financial advisor if they are unsure whether investments are suitable. MARCH 2015 www.svssecurities.com SVS Securities Plc is Authorised and Regulated by the Financial Conduct Authority (Reg No. 220929) and is a Member of the London Stock Exchange. Registered in England and Wales. Company number 04402606. Registered Office: 110 Fenchurch Street, London, EC3M 5JT
Smart Connections - A New Roadmap? Q1 2015 Vehicle telematics can be defined as the use of computers and telecommunications to enhance the functionality, productivity and security of both vehicles and drivers. Today telematics is helping adapt the way we drive and future mobility trends are likely to see a rise in demand for connected car solutions and services over the next 10 years. Indeed, the EU is working on proposals to introduce mandatory black boxes into every new car in Europe from 2018. The joining together of travel/transportation and big data is seeing analytics now being utilised to model demand, capacity, logistics, scheduling, revenues and costs plus improve driver behaviour. How to monetarise this data represents a key opportunity for solution providers. The world s largest technology companies are all now examining opportunities in the emerging connected car space with Apple the latest one believed to be looking at electric and connected car technologies in addition to its own self-driving vehicle. Samsung, Sony and Google being other names in the frame. Telematics is still relatively young and given the fragmented nature of the industry, consolidation is inevitable and we would anticipate that this will be an ongoing theme going forward. We include profiles of two AIM companies, Quartix and Trakm8 for investors potentially looking for exposure to this emerging niche sector driven by innovation and technological change. 1 Smart Connections - A New Roadmap? Q1 2015
Vehicle Telematics A New Roadmap? Vehicle telematics can be defined as the use of computers and telecommunications to enhance the functionality, productivity and security of both vehicles and drivers. A key element of many telematic solutions is vehicle tracking also known as fleet management. Typical vehicle tracking systems are made up of two core elements; a GPS Location Tracking device and some user software. Today telematics is helping adapt the way we drive and future mobility trends are likely to see a rise in demand for connected car solutions and services over the next 10 years aided by governments, regulation, car manufacturers and insurance providers. Indeed, the EU is working on proposals to install mandatory black boxes in every new car in Europe from 2018, to provide constant speed monitoring, steering angle and braking whilst providing police with the means to locate every new car on the road. Market Backdrop Telematics is still a relatively young and fragmented market which is continuing to adapt to changes in innovation and technology. Adoption in European countries (France, UK, Germany and Spain) has been increasing year on year with fuel efficiency gains from telematic solutions taken as given. With the advancement of tracking technology and telematic data analysis, the functionality of vehicle tracking systems has also increased making them more attractive and cost effective for end use customers. Berg Insight in a report published in October 2014 put the number of active fleet management solutions deployed in commercial vehicle fleets in Europe at 3.65m in Q4 2013. This number is forecast to reach 7.10m by 2018, a CAGR of 14.2%. In the European fleet management market, a number of aftermarket solution providers have emerged such as Masternaut, TomTom Telematics, Trimble and Digicore. In the UK, fleet tracking businesses includes the likes of MiX Telematics, Tracker, Trafficmaster, Quartix and Trakm8 (see also Company Profiles section below). Since 2008, UK car insurance providers have been including vehicle tracking technology in their consumer pay as you drive packages so as to cut the cost and number of insurance claim incidents with a focus on new and young drivers and to improve driver behaviour. It is believed that insurers will look to introduce the use of telematics within their wider vehicle insurance offering (including commercial vehicles) as technology functionality improves and may become an opt out as against an opt in decision going forward according to GoCompare. Indeed, potential new sub-sector telematics market opportunities may well emerge in the areas of public sector fleets and with leasing companies. 2 Smart Connections - A New Roadmap? Q1 2015
OEMs are looking to work together with aftermarket players to offer fleet management solutions. PSA Peugeot Citroén in partnership with Orange Business Systems launched a fleet management service in France in April 2014. Ford and Telogis have partnered to deliver fleet management solutions to Ford customers in Europe. Teletrac has for a long time worked with OEMs in the UK market including Mercedes Benz and Citroén. The world s largest technology companies are all now examining opportunities in the emerging connected car space with Apple the latest one believed to be looking at electric and connected car technologies in addition to its own self-driving vehicle. Samsung, Sony and Google being other names with the latter having already built its own prototype driverless car. According to Huawei, the Chinese electronics firm in its Building Better Connected World Report in November 2014, connected cars may need separate virtual networks to carry data traffic, adding that this may see new partnerships between service providers and car manufacturers. Themes and Key Trends The joining together of travel/transportation and big data is seeing analytics now being utilised to model demand, capacity, logistics, scheduling, revenues and costs plus improve driver behaviour. Progressive operators are now looking beyond fuel savings in terms of additional valueadd with the biggest benefits likely to be realised with operators and suppliers working together and potentially is the way forward according to MiX Telematics. The value of big data and how best firms can monetarise this data they hold driving habits, vehicle usage with insurance companies providing lower premiums to new and young drivers on the back of this information. Road safety remains high on the agenda with there being a link between telematic solutions and a reduction in accident rates. Telematics can play a role in validating the performance of electronic and hybrid vehicles. Systems integration ongoing push for even more operational savings will result in increased integration of onboard systems with vehicle telematic solutions being the central hub. Consolidation Given the fragmented nature of the telematics industry, consolidation is inevitable and M&A was a theme in 2014 and we would anticipate that this will carry on into 2015. Notable transactions in the year included the following: Acquisition of UK-based Tracker by Lysanda. TomTom acquired French FM provider DAMS Tracking. Divestment of Masternaut by Francisco Partners to Fleetcor and Summit Partners. Acquisition of Cobra Automotive by Vodafone. Insure the Box sale of majority holding (75%) to the Japanese insurer ANDIE, the latter having strong links to Toyota 3 Smart Connections - A New Roadmap? Q1 2015
Market Growth Opportunity Source: Trakm8 4 Smart Connections - A New Roadmap? Q1 2015
Company Profiles In this section we profile two companies quoted on AIM for investors looking to gain exposure to this niche area and both are also featured in another SVS Commentary on the AIM market. Quartix Established in 2001, the company is a supplier of subscription-based vehicle tracking systems, software and services in the UK, providing an integrated tracking and telematics data analysis solution for fleets of commercial vehicles and pay as you drive motor insurance providers. The latter is building on its relationship with Wunelli, a LexisNexis company. These are designed to improve productivity and lower costs by capturing, analysing and reporting vehicle and driver data. It was admitted to trading on AIM in November 2014. Play on exposure to the expanding connected car market providing vehicle tracking systems for commercial fleets and motor insurers. Lean business model with product manufacturing and assembly outsourced with sales handled through telephone marketing, price comparison websites and a network of distributors and installers. Proprietary and scalable platform system provides business critical reporting and analysis of vehicle and driver data including timesheets and other KPIs to customers via any internet-enabled device. Vehicle tracking systems can be purchased by the customer outright or rented on a monthly basis with no up-front cost and pricing based on the level of functionality needed. High level of recurring revenue visibility in the fleet sector help underpin its growth objectives to expand in the UK, France and US combined with ongoing progress in its insurance business. Maiden Full Year Results on 3 March showed total revenue ahead over 16% to 15.3m, a high level of recurring revenue in the fleet sector ( 9.8m), adjusted PBT of 4.8m and good cash conversion. It noted a strong start to the year, in line with its expectations and is now yielding over 3% based on FY2015 forecasts. Note that investors need to take into account its limited history as a quoted company and free float/liquidity in the shares is also an issue. Trakm8 The telematics company was admitted to trading on AIM in 2005 and is using big data to improve driver behaviour. Trakm8 distributes its hardware and software through a network of distributors worldwide and provides vehicle monitoring and tracking services direct to the B2B market. The company s system owned IP products and services allow vehicles and drivers to be monitored, allowing organisations to manage deliveries and services, or track stolen vehicles. Trakm8 s services include driver behaviour management solutions that can reduce fuel consumption by 10% or more, reduce the risk of accidents, whilst making logistics routing and scheduling packages more efficient. The T10 is the next generation of hardware from Trakm8 and includes GPS, GPRS, CAN, accelerometer and sub-second data logging data provision. The company s in-house team can analyse driver and vehicle behaviour to identify significant data trends and improve profile assumptions. Its customers include Direct Line, Eon, the AA, Fujitsu and Kubota. Committed to exploiting big data to improve driver behavior both for fuel economy and risk reductions, as well as driving service and repair quality factors. Building a big database of information (collecting 2bn miles of data per annum) which it expects to monetarise going forward. 5 Smart Connections - A New Roadmap? Q1 2015
Growing installed base with over 80,000 units/devices reporting to its servers with blue chip customers. All solutions are designed, developed and manufactured in the UK, with the majority being produced in-house at Trakm8 facilities. Disciplined financial model with emphasis on recurring/long term service revenues and is also high margin and cash generative. Strong H1 Results in December showed the benefit of the BOX Telematics acquisition in 2013 with revenue more than trebling to 8.5m (organic growth yoy 66%) and PBT of 717,000. Focus on growing recurring revenues saw annualised recurring revenues up 130% to 5.3m (H1 2014: 2.3m). Strategy is to continue to drive organic growth by expanding the customer base, increasing the range of solutions offered and broadening its geographical coverage. Investors need to be aware of the strong rise in the company s share price over the last year, free float/liquidity with no dividend forecast for the foreseeable future as cash flow is being used for ongoing investment in the business. Name Ticker Sector Live Mid Price (p) Live Market Cap m Live 2015 PE (x) Live 2015 Yield (%) Live 2016 PE (x) Live 2016 Yield (%) Quartix QTX Software & Computer Services 163 76.12 17.34 3.07 14.42 3.31 Trakm8 TRAK Technology Hardware & Equipment 109 31.50 19.12 0.00 13.63 0.00 1. Quartix and Trakm8 feature in a separate SVS commentary on the AIM market. 2. Share prices as of 4 March 2015 from Proquote and consensus data via Morningstar and finncap broker forecasts. Challenges Telematics or rather black boxes do however present several issues in which investors need to take a view. These challenges include the following: Need for reliable broadband network coverage, high speed connection and short latency. Security and lack of common standards. Ability to collect, transmit and process huge amounts of real time data. Summary Telematics is helping adapt the way we drive and future mobility trends are likely to see a rise in demand for connected car solutions and services over the next 10 years hence the interest from the large technology companies. Indeed, the bringing together of travel/ transportation and big data is seeing analytics now being utilised to model demand, capacity, logistics, scheduling, revenues and costs plus improve driver behaviour. How to monetarise the amount of data being generated is a key opportunity for solution providers in what is a fragmented sector with consolidation seen as inevitable with operators and suppliers likely to work together going forward. 4 March 2015 Trisha Reay 6 Smart Connections - A New Roadmap? Q1 2015
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