I have recently bought in after watching from the sidelines during that crazy time. As many people are aware, both holders and non holders,
there are clear red flags; 1 customer, insider sales, falling GP margin etc. Additionally we know that 1Q21 will be weak per company guidance. To debate or ignore these risks or red flags shows ignorance.
BUT, for every investment there is a risk adjusted return and a point at which even a company with higher risk becomes attractive. I believe we are at or near that point now.
Why do I think that? Well the heat is now out of the SP. Key sellers have sold and we are now in a position where early holders (post FY20 results) are sitting on big losses and unfortunately, are cutting their losses. These can often be key times to buy.
Also, while many focus on the red flags, which is more than appropriate, it's worth also acknowledging the strong performance and track record of the group across all key metrics. All show excellent growth and we need to pay the score board and back this performance. While they have one customer, they have a globally known customer that would have been hard to onboard. Additionally the company is in profit, has a good balance sheet and operates in a high growth industry. In fact
McKinsey estimate that the telematics industry will have a CAGR of 20% p.a to 2030. - that's not a typo. See below from a broker report on a competitor.
For me, while I have a number of concerns, these are more than offset by track record, valuation, and upside.
Upside you say? Well, in my experience, once you're
'inside the tent' it's much easier to win business and cross sell. They are inside a
very large tent - that being GM. The cross sell and penetration upside in
GM alone is significant. While some focus on the time left on the contract I believe those concerns are overblown. In large businesses, changing processes, training staff and embedding technology is painful, it can be expensive and employees hate change. More often than not, it's simply easier to renew than churn.
I believe the risk of losing the GM contract is very low and that has formed part of my investment decision. Obviously others may have a different view and that's ok, these mismatches in views have enabled me to buy at a price that I believe will generate good returns in the future but clearly there is risk (see point on risk adjusted returns above)
For investors (not traders), 12 months is nothing. 1H20 is probably going to be average but that will be covid induced. From what I've seen (elsewhere), sales and pipeline have been deferred and not lost due to covid. For CXZ, this just pushes out pending growth opportunities.
Clearly on a range of valuation metrics this SCREAMS cheap and that is because there is a discount for the red flags above. But when the risk falls away and the announcements come, the discount drops away and the re-rating can be very quick and violent. When will that be? I have no idea, but taking a 12 month view I'm confident enough to risk my capital in this ~$15m market cap business. Clearly the upside is significant and another key point from the broker report I've referenced above is that the industry is undergoing consolidation - this would make a useful acquisition for a larger player for literally nothing and at these prices, even with a large premium, it's likely to be higher accretive. Food for thought.
This is not advice and is all IMO. GLTAH
