Karooooo Ltd. annual report, Q4 FY2021

Business context and reporting period

Karooooo Ltd.’s Form 20-F, filed June 28, 2021, reports the fiscal year ended February 28, 2021, with comparisons to the year ended February 29, 2020. It is an annual filing, not a standalone 2020 Q4 report; it also provides unaudited quarterly results, including Q4 ended February 28, 2021. Financial statements are prepared under IFRS and presented in South African rand (ZAR).

Karooooo was a non-operating holding company at fiscal year-end, owning 68.1% of Cartrack Holdings, the fleet-management and mobility-data SaaS business. Historical statements were recast using pooling-of-interests accounting for a common-control transaction. After year-end, Karooooo listed on Nasdaq on April 1, 2021 and completed the Cartrack minority buyout and JSE inward listing on April 21, becoming Cartrack’s 100% owner.

Key financial metrics

Amounts below are ZAR millions, except per-share data, subscriber counts and percentages. Margin figures are calculated from reported amounts.

At February 28, 2021, total assets were R2,915.1 million, total liabilities R1,632.7 million and equity R1,282.4 million. Current assets of R1,326.9 million were below current liabilities of R1,434.3 million. Current assets included R882.4 million of restricted cash associated with a related-party loan; it should not be treated as freely available operating cash. Cash and cash equivalents were R104.9 million, with a R28.8 million bank overdraft; cash net of overdraft was R76.1 million.

Debt and lease obligations included R15.9 million of term loans, R98.7 million of lease liabilities and R28.8 million drawn on the overdraft. A separate R882 million related-party loan was outstanding at year-end and was repaid on April 22, 2021. The R925 million Standard Bank revolving facility was undrawn at year-end; R75 million was committed and R850 million uncommitted.

Material changes versus the prior comparable period

• Growth was driven primarily by subscribers (+16%) and a modest increase in annual ARPU, from R151 to R154. ARR rose 18%. Subscription services contributed 96% of FY2021 revenue, versus 97% in FY2020.
• Operating profit grew 15%, slower than revenue growth, and operating margin declined from 32.5% to 31.7%. Sales and marketing expense increased 34% and research and development expense increased 123%; management cited higher growth investment, including in the second half.
• Expected credit losses rose 47% to R80.8 million. The filing attributes this partly to pandemic-related bad debts and extended payment holidays and terms. The receivables loss allowance rose to R101.1 million from R51.7 million.
• Operating cash flow increased 4%, while free cash flow declined 10%, mainly reflecting increased investment in telematics devices and components. The company reclassified R220.9 million of device inventory to property, plant and equipment; management says operating cash-flow growth would have been 11% on a like-for-like basis after adjusting the prior-year comparison.
• South Africa remained the largest market at 73% of revenue. FY2021 subscriber growth was 17% in South Africa, 3% in Africa-Other, 12% in Europe and 20% in Asia-Pacific, Middle East and USA. Africa-Other revenue declined 9%.

Outlook, management commentary, risks and unusual items

• Outlook: The filing gives no formal numerical revenue or earnings guidance. Management describes plans to expand subscribers, develop products and grow internationally, particularly in Asia-Pacific and the Middle East. It expects sales and marketing, R&D and administrative costs to rise in absolute terms as the business grows. Management states that operating cash flow, cash on hand and available facilities should fund working capital and capital expenditure for at least 12 months; the directors also affirmed the going-concern basis, taking account of the subsequent listing proceeds.
• COVID-19: Restrictions affected installations, customer collections and sales activity, especially in the first half. The company added 48,658 net subscribers in the first half and 130,827 in the second half, and reported 16% subscriber growth for the year. Management continued to monitor the pandemic’s effects.
• IPO and corporate reorganization: FY2021 included R25.6 million of IPO costs in profit or loss. Total expected IPO costs were R83.7 million: R34.6 million to be expensed and R49.1 million offset against share capital; the filing estimated a further R9.0 million expense in FY2022. The April 2021 IPO raised US$33.8 million gross. Subsequent issuance and the Cartrack buyout materially changed the group’s ownership and share count.
• Other unusual matters: The R882 million related-party loan was used to facilitate the Cartrack acquisition and was repaid after year-end. The founder’s R2,739.6 million shareholder loan had been converted into Karooooo shares in November 2020. The company also reported a R19.4 million interest-free loan to a related party, repayable on demand.
• Principal risks: Customer acquisition, retention and collection; COVID-19 effects; competition and embedded OEM telematics; technology, cybersecurity and privacy compliance; dependence on cellular networks and component suppliers, including semiconductor availability; foreign-exchange exposure (the group did not hedge currency risk); and concentration in South Africa. The filing also cites South African power-supply disruptions and regulatory, political and economic risks in emerging markets.
• Contingencies and governance: The company reported no known legal proceedings expected to have a material adverse effect. It disclosed one fatality and three other injuries in stolen-vehicle-recovery operations during FY2021, while stating authorities found the personnel acted lawfully. Disclosure controls were assessed as effective, but the filing did not include management’s internal-control-over-financial-reporting assessment because of the newly public company transition period.

Important facts for investors to verify

• Confirm the post-April 2021 share count, ownership and Cartrack buyout terms, and distinguish those subsequent events from the February 28, 2021 reporting-period balance sheet.
• Review the liquidity treatment and repayment of the restricted related-party loan, the overdraft balance, and the terms and availability of the committed and uncommitted facilities.
• Assess the trajectory of receivables, expected credit losses and collections after pandemic payment relief, as well as the cash-flow impact of device investment.
• Reconcile IPO costs and other adjustments in non-IFRS measures; Adjusted EBITDA, ARR, adjusted EPS and free cash flow are supplemental measures, not IFRS measures.
• Consider the accounting effects of the common-control pooling method and the prospective device reclassification, including their effect on comparability.
• Check subsequent filings for Section 404 internal-control progress, execution of international growth plans and developments in supply, cybersecurity, currency and South African operating risks.