Description

Ituran (ITRN) is an Israeli telematics company with 70% of its revenue coming from recurring subscription fees. On a reported basis, Ituran trades at an EV / Sales multiple of <2x  and an EV / FCF multiple of 10%. Revenues and subscription growth were challenged during the pandemic but have returned to growth. On top of this, Ituran holds a 17% stake in a Unicorn that was recently valued at $1 billion, making the current entry multiple even cheaper. 

What do they do?

Ituran was started in 1995  with the intent to commercialize Israeli, military-grade telematics  for the  consumer vehicle market. They first came to market with a technology / subscription service called Stolen Vehicle Recovery (SVR) which represents nearly all of their service and product revenues today.  Whether SVR is sold to OEM’s or sold on an aftermarket basis depends on geographic location. In Israel, where Ituran has >80% market share, SVR is installed by the OEMs and is required for auto insurance. In Latin America and Mexico, there is a mixture of OEM customers and aftermarket customers. 

SVR customers (and some insurance companies) pay a recurring monthly subscription to Ituran that averages around $100 / year. In the event that a customer's car is stolen, Ituran alerts the authorities immediately and provides location data for vehicle recovery. SVR is highly dependent on relationships with insurance companies which frequently makes SVR a prerequisite for insurance. In Brazil and Argentina, which are Ituran’s two biggest South American markets, insurance companies either subscribe to SVR directly on behalf of their customers or require their customers to subscribe to SVR. 

While there are competitors in this space, there are several barriers to entry that have enabled Ituran to maintain and grow its subscriber base:

• SVR requires a 24/7  International Call Center / Recovery Team that works with law enforcement to recover stolen vehicles. In some countries Ituran  sends its own private teams to recover the vehicles.  Out of Ituran’s ~2,700 employees, close to 1,000 work in their private enforcement  and operations division. The point is that an upstart or OEM would not be able to easily enter this business . without setting up the supporting infrastructure.  Time to recovery is key, and the ROI for insurance companies depends on how fast stolen cars can be recovered before they are harvested for parts or completely ruined. This serves as a natural barrier for new entrants, including electric vehicles manufacturers that lack experience with SVR technology.

• Criminals are continually uncovering hacks to disable SVR systems; this requires ongoing engineering on the part of SVR technology companies, a task that OEM’s would much rather outsource to a trusted third party. 

• As relates to Ituran’s OEM business, their design wins are sticky given the complexity of the integrations necessary to make the SVR technology deeply embedded in the car for added protection.

Variant Perspective on SVR

It is perhaps challenging for US based investors to appreciate the durability of  SVR given the  low penetration of similar services in the US .  Here are a few data points to clarify the resilience of SVR:

• As evidenced by Ituran’s Q121 results and solid 2H of 2020, SVR is a growing business especially in locations where car theft / lack of enforcement is a persistent challenge. In Q121 on a total subscriber base of 1.79mm, Ituran added 25,000 aftermarket subs and 20,000 in total subs after accounting for 5,000 OEM losses. This equates to around ~4% organic growth in subs on a run-rate basis. 

• Product revenues of  $21mm in Q121 were the strongest quarter since Q418. This is a razor/ razor blade business with product revenue leading subscription revenue. Therefore, it’s  reasonable to anticipate an increase in the organic subscription revenue growth rate.  

• In Q418, Ituran bought a competitor in South America called Road Track Holdings, for $113mm. The Road Track integration has taken longer than expected. However, as of the last conference call, Ituran’s CEO is projecting “several thousand” new subs per month from a new product launch in Mexico . This is in addition to the current growth in Ituran’s subscriber base.

SVR is a  relatively stable annuity that can continue to grow well into the foreseeable future while generating  substantial free cash flow to support the dividend and share buybacks. More importantly, management has proven that they  are willing to share free cash flow with shareholders:

2020 was a difficult year for new car sales which weighed on the subscriber growth but the Q121 results and management commentary indicate that the worst of the pandemic slowdown is done and SVR is likely to return to its historical growth rates.

Call options

As value investors, we appreciate the margin safety around the annuity stream and return of capital to shareholders. But this is an Israeli company where scrappiness and innovation are in their DNA. Therefore, it’s not unreasonable to highlight two additional opportunities for growth:

-Usage Based Insurance (UBI): UBI refers to a hardware device that is attached to a car that records and analyzes driving behavior.  Ituran launched their UBI offering in April of 2019.  With  data from UBI, insurance companies can  offer personalized insurance policies. Given that Ituran has long standing relationships with OEMs and insurance companies, it is logical for them to offer UBI to their customers as a complementary product along with SVR. Ituran’s UBI offering has been implemented by five Israeli insurance companies already. UBI is a crowded space with both hardware-based telematic solutions and app-based solutions. As such, Ituran has a differentiated solution for any customer that also wants SVR. 

-Fleet Management: Ituran currently has 324,000 end users through 23,000 corporate customers. Similar to the go -to -market strategy in UBI, Ituran can leverage their expertise in telematics without spending a lot to enter this market. 

At the current valuation, the market is not giving much if any credit to these initiatives. In the event they don’t succeed, the capital investment is low. If they do succeed, they could provide additional support for the annuity stream in the future.

Valuation and “Hidden” Value in the VC investment

As can be seen in the table above, we adjust Ituran’s EV to reflect the value of their 17.2% interest in a startup called Bringg which recently completed a Series-E  round at a $1 billion valuation:

https://www.sec.gov/Archives/edgar/data/1337117/000117891321002081/exhibit_99-1.htm

Bringg is a software/ logistics company that enables enterprises to scale up their last-mile delivery. As of their last quarterly reporting on March 31, 2021, Ituran recorded their interest in Bringg at $3.6mm. Clearly, there is an enormous gap between reported value and the $170mm value implied by the last round of financing. We value Ituran’s  stake at $127mm which represents a 25% discount to this latest round. 

The crux of our thesis is that Ituran’s  SVR business  is underappreciated for its durability, high free cash flow generation, and potential for organic growth. After adjusting for Bringg, the market is valuing Ituran at a 14% fcf to Adj. EV.  At a 5% to  10% FCF to Adj. EV,  Ituran is worth between $31-$55/ share. Our base case is Ituran re-rates to a 10% FCF / Adj. EV once it moves beyond its pandemic headwinds and returns to  mid single-digit organic growth.    

In conclusion, we think the current entry price represents a decent margin of safety relative to the potential upside. It is worth noting that the insiders own 20% of the company.  While it’s nice to have alignment, G&A at $50mm (down from $55mm in 2019) exceeds R&D and S&M by ~$25mm. The 5 highest paid officers earned $6mm in aggregate cash comp in 2020. This is not part of our thesis but it does make one wonder what this business could cash flow if owned by a strategic or financial buyer.  In the meantime we’re content to wait around  with a 2.3% dividend yield, $19mm share buyback in place, improving trends in SVR, and the  potential for a  massive liquidity event with a Bringg IPO. 

Catalyst

-Moving past Covid headwinds in SVR

-Road Track laucnh in Mexico

-Bringg IPO or liquidty event