Description

Ituran Location and Control Ltd (ITRN) is $720M market cap business headquartered in Israel.  The company provides telematics services primarily used for stolen vehicle recovery and fleet management. Ituran provides these services in a recurring subscription fee model (~70% of revenue) and one-time product revenue (~30% of revenue).  The company is a market leader in Israel with ~80% market share and is growing in Latin America. 

What do we like about Ituran?

1. Subscription Revenue Model: As of March 2019, the company had 1.78M subscriber base – with operations primarily in Israel (~31% of subs), Brazil (~31% of subs) and the balance throughout Argentina, Mexico, Colombia, Ecuador, and the United States.  Over the past 15 years, Net Subscriber base has grown at a CAGR of 15% after offsetting an average ~3% monthly churn rate.

Ituran operates in the local currency but reports results in USD. As a result, P&L has been negatively impacted by FX. In 1Q2019, Ituran subscription revenue was up 19% yoy. However, in the local currency, subscription revenue was actually up +36% yoy.

2. Higher Returns on Capital and Incremental Margin: Ituran has consistently delivered ~50% gross profit margins with ~63% GP margin on sub revenues and ~20% GP margin on the one-time product. Excluding growth investments, Ituran should be getting higher incremental margins on sub revenue in places like Israel/Brazil as it can scale on the existing infrastructure. The business should generate +40% ROE as they continue to grow their subscriber base.

3. Growth Potential: Ituran is the market leader in telematics services in Israel and is considered a monopoly; they primarily compete with Pointer and Skylock. Management claims ~80% market share in Israel. They are experimenting (User Based Insurance) with B2B business model with insurance providers. Brazil is a more fragmented market. There are +90M registered vehicles and Ituran is one of the market leaders with ~555K subs (<1% market share) and a long runway for growth. Over the past 5 years, vehicle registrations in Brazil have averaged ~200k per month. Brazil is also interesting because of the large uninsured population. Ituran’s recent (Sept 2018) acquisition of Road Track Holding should also give Ituran an opportunity to grow its OEM business in Colombia, Ecuador, and Mexico. Additionally, management has plans to venture into the Indian market (+250M registered vehicles).

4. Solid Capital Allocation and Balance Sheet: Ituran has been free cash flow positive for a long time. Management had kept the balance sheet clean with no debt until their recent acquisition in Sept 2018. As of 1Q19, net debt is at a very manageable level of $19M (< 1x EBITDA).  The company has also kept total shares outstanding steady ~21M for several years. Growth has been funded with internally generated cash flow. We also like the alignment of interest with the management team. Co-founders Izzy Sheratzky and Yehuda Kahane are the largest shareholders of Ituran.  Collectively, insiders own ~19% of shares. Management pays a modest dividend of $5M ($0.23 per share) per quarter or ~3% yield. The board has also authorized a share repurchase in an amount up to $25M by 2020 – which we think is an attractive use of capital at current valuation.

5. Valuation: Itruan is currently trading at a market cap of $720M ($30.50 per share); pro forma ~12x 2018 PE and ~7x EBITDA. Current P&L does not fully reflect Ituran’s recent acquisition, while balance sheet does. We think this is an attractive price for a growing, asset-light, recurring revenue business model with positive free cash flow and high returns on incremental capital. 

Key Risks:

1. Unfavorable foreign currency impact. Mostly of Ituran’s revenues are generated in the local currency but reported in USD. 
2. An economic slowdown in Brazil or a meaningful decrease in high-end vehicle sales in Brazil/Israel. 
3. Intensified competitive dynamics in Brazil/Israel. 

Catalyst

1. Continued execution on growth
2. IR effort from the management team in 2019