MiX Telematics: More Growth Required

Intro

We wrote about MiX Telematics Limited (NYSE:MIXT) (Mobile Asset Management Firm) back in May of last year when we stated that a dividend cut may be a likely outcome over the near term. Although there was a minor decrease of roughly 3% in the quarterly payout last September, the major ADS dividend cut came in December when the quarterly payout dropped from $0.06 to $0.04 per share. As a result, shares are down roughly 14% since our most recent commentary which is a sizeable number considering the S&P rallied roughly 3% over the same timeframe.

In terms of the fiscal 2023 Q2 numbers which finally led to the dividend cut, net profit actually came in negative at $1.2 million despite the company reporting growth in specific areas for the quarter. Subscription revenues increased by 10% in Q2 to almost hit $31 million & Annual Recurring Revenue (ARR) jumped by 17% surpassing $128 million. Then in Q3, the company bounced back into profit ($2.8 million of net profit for the quarter) and once more reported growth in ARR, subscription revenues, and the all-important subscriber base which grew to 959k in the quarter. The company continues to report customer wins but we are not seeing these wins being reflected in shareholders' returns as of yet.

More Growth Needed

However, not enough growth is being realized in order to significantly move the needle with respect to bottom-line profitability as we see in the company's broader growth metrics below. Although forward growth numbers regarding top-line sales as well as EBITDA have been improving, they still trail the sector in general by some distance, especially on the profit side.

Technicals

Then you have the technicals as we see below which show that MiX Telematics has been caught in a $2 per share trading range for the best part of 10 months now. Suffice it to say, it stands to reason that the longer consolidation periods persist, the more difficult it will be for shares to break out above overhead resistance. Furthermore, recent consolidation has seen the popular ADX trend indicator come right back down below the 15 level which basically means that shares lack a clear trend at present. This points to more consolidation which is why we would not put capital to work in MiX Telematics at this present moment in time.

Dividend Worries Persist

MiX Telematics has been averaging more than $5 million in its capital spending budget in recent times. Therefore, the company's operating cash flow ($17.5 million over the past four quarters) has not been high enough to cover this spending which means positive free cash flow generation has been absent in this timeframe. In fact, even from an earnings standpoint, the trailing GAAP payout ratio currently comes in at a very elevated 86%. This means at least over the near term, MiX Telematics will find it very difficult to grow the payout which really is what investors need at present. Why? Because if stagflation in the share price persists (Which will result in little capital gain appreciation in the stock), investors need a thriving dividend in order to protect their respective purchasing power. With inflation running at approximately 6%, a slow growing 2.74% dividend yield from MiX Telematics will not be enough to produce real returns in a stagnating environment.

Return On Equity

Bulls will obviously point to the very keen valuation MiX currently trades at as well as the company's strong balance sheet but the market will only reward MiX correspondingly if the company can prove it can grow its earnings consistently. The return on equity profitability metric enables us to see the earnings power of MiX when derived from the company's equity on the balance sheet. Suffice it to say, having plenty of equity on the balance sheet is one thing but if this equity is not being productive in generating earnings, then the market will take notice quickly. If we plug the company's numbers into the formula where

ROE = Trailing 12-Month Net Profit / Shareholder Equity

Return On Equity = 5.7 / 111.8 = 5.1%.

Now although the company's most recent quarter (when we average out the quarterly net profit number) saw an increase in the company's ROE, we continue to see a below-average ROE trend which is obviously not what shareholders wants to see.

Conclusion

Therefore to sum up, although MiX Telematics has been growing, this growth has not been coming as fast as the market would like. Furthermore, with the company's strong overhead resistance on the technical chart, high payout ratio, and below-average ROE percentage, we deem MiX Telematics a hold at this stage. We look forward to continued coverage.