Pointer Telocation — Driven by technology

Pointer Telocation has been transformed over the past 18 months by a stream of innovative product launches in the fast-growth areas of the internet of vehicles – CC and cloud-based sensor systems – and driver monitoring systems. In the core mobile resource management (MRM) business, PNTR is oriented towards underserved developing markets where telematics demand over the next 3-5 years should be driven by efficiency savings and regulatory catch-up. High operational gearing via its cloud solutions give this part of the business strong margin growth prospects. Helped by this and management’s track record in acquisitions we expect management to achieve its target of doubling revenues and attaining 25% EBITDA margins over the next 3-5 years. High (66%) recurring cloud-SaaS revenue and a strong balance sheet underpin the group. We see good potential for PNTR’s shares to re-rate over the next 12 months.

Pointer reported a 21% increase in FY17 revenues to $78.2m, with EBITDA up 42% to $13.9m, supported by synergies from the Cielo acquisition in Brazil and ongoing benefits of operational leverage, leading to a 2.3pp increase in EBITDA margin to 17.5%. A drop in Q4 product revenues arose as fleet customers ran down stocks of 3G equipment in anticipation of the move to LTE in 2018. With sales of new LTE products to commence in H218, PNTR should see sales bounce back later in the year. We have trimmed our forecasts for 2018 on more conservative ARPU assumptions but increased our 2019 forecasts to reflect recent successes in the CC and driver monitoring space.

Pointer Telocation’s shares currently trade at an attractive 16% discount to the telematics sector on 2018e EBITDA multiples. With the transformation of the group into a multi-pronged technology growth stock, we believe that the shares should be rated in line with the sector, giving rise to a peer group-based valuation of $20.8/share (NIS71.8/share). Our DCF model gives rise to a valuation of $20.9/share (NIS72.2/share). We note that sector valuations are heavily influenced by M&A and see the potential for further expansion of PNTR’s product range to continue to attract new investors.

MRM product sales are geared to new vehicle sales and replacement cycles, which are sensitive to interest rates and economic growth. Product lifecycles have fallen in recent years from 3-4 to 2-2.5 years, and products are growing more complex, requiring the company to spend more on R&D to maintain sales. Rising factory installations of CC and telematics products are likely to affect sales of the aftermarket products produced by PNTR. Nevertheless, as most fleets source vehicles from a variety of OEMs service aggregation demand should remain strong. PNTR reports in US dollars, but sources most revenues in Israel, Brazil, Argentina and Mexico, giving rise to currency risk. PNTR has an unprovisioned $11.5m tax claim in Brazil, which its lawyers expect to be heavily negotiated down and take many years to resolve.

PNTR is a leading provider of MRM products and services to the fleet management, automotive, insurance and logistics sectors. It also designs and sells products and technology on a B2B basis. These include devices for fleet management as well as for cargo tracking and monitoring and, following a 2017 launch, products for the CC space. The group has an emerging markets focus: key markets include Israel (46% of 2016 revenues), Brazil, Argentina and Mexico, Africa and India.

With growing demand for advanced telematics and mobile resource management as a service (MaaS), a high degree of operational leverage and successful track record of acquisitions, the group was able to generate 21% revenue growth and a 42% increase in EBITDA on the back of a widening in EBITDA margin. PNTR has strongly delivered on milestone targets over the last 12-18 months. New product launches during this time are already translating into order flows. The group’s advanced driver-monitoring technology has resulted in a contract for monitoring NYC ride-hail drivers together with Mobileye, as well as drivers of a major soft-drink distributor in Latin America. The group’s CC offering has resulted in a contract in the OEM market with Nissan India as well as with an Israeli car importer for the aftermarket. IoT multi-sensor-based real-time cold supply chain monitor CelloTrack Nano recently announced a recurring $2-3m pa order in the US. Successful innovation and focus on R&D and IT and ownership of its own IP are key drivers of client stickiness.

PNTR’s management has a well-established group strategy. The key goals are: (i) to continue to develop cutting-edge technologies to provide actionable business intelligence with strong ROI potential to fleet management, mobile asset management and Internet of Vehicle (IoV) customers; (ii) pursue selective M&A opportunities to expand the group’s market share and capabilities; and (iii) to continue to grow revenues organically while improving profit margins.

Encouraged by positive customer reaction and contract successes in what is still a new area for the group, management’s goal is also to become a leading provider of IoV services, as well as MaaS. The group is also looking to add new services to its MaaS portfolio in 2018, oriented to providing greater value-added to goods distributors. With the high level of operational gearing of adding new cloud customers at low incremental costs and its ability to integrate local acquisitions into its existing infrastructure and remove cost layers, this strategy is a driver not only of the top-line but also margins, which have widened steadily under its influence in recent years. Taking ongoing acquisitions into account, management targets a doubling in revenues over the next 3-5 years, with EBITDA margins targeted to widen to 25% from 17.5% in 2017.

MRM is increasingly positioned at the centre of transportation and logistics, reflecting rising costs of commercial vehicles and the need for fleets to boost efficiency in highly competitive markets. A key driver is therefore ROI-led growth in penetration, but this is increasingly being driven further by new regulatory requirements. Berg Insight forecasts that MRM penetration of non-privately owned commercial fleets in the US was only 23% in 2016 but will increase to 41.7% by 2021. The same numbers for Latin America are 10% to 17%, giving rise to 13% market CAGR over this period (vs 15% in the US). MarketsandMarkets forecasts the global fleet management market to grow at a CAGR of 15.8% between 2017 and 2022. Including MaaS, it forecasts a CAGR of 24% to $34.6bn through to 2022.

Regulation is being implemented at different speeds around the world and, while the EU and US tend to lead, emerging markets are starting to play regulatory leapfrog in a number of areas. For example, Indian regulators have recently implemented law AIS-140 requiring a vehicle tracking device and one or more emergency buttons in all existing and new public service vehicles, with a road map to expand to vehicle health monitoring, CCTV cameras and passenger systems, etc. In the US and EU regulators are also looking to require commercial vehicles to carry tracking devices, as well as regularising connected vehicle networks and tightening emissions and safety standards.

We identify increasing installation of telematics in fleet vehicles during their production as a potential threat to telematics service providers. Nevertheless, at the end of 2016, the leading three European OEMs had only a 4.4% share of European fleet management subscriptions (source Berg Insight). Apart from a few fleet managers who will decide to employ one OEM brand in their fleets, we expect most fleet operators to continue to use multiple vehicle brands and to therefore still need third-party telematics services to provide data aggregation and advanced analytics.

Pointer has been active in MRM for 18 years, during which it has built major market positions in Israel, Brazil, Mexico, Argentina and Southern Africa. In total, the group has 258,000 MRM subscribers, to date having sold 1.3m telematics devices for commercial vehicles in 52 countries. The strength of the value proposition is the group’s tailored services and its commitment to maintaining a cutting edge in technology. We see Pointer’s combination of fleet management, driver monitoring, advanced diagnostics and stolen vehicle recovery and its continued expansion of these services as a powerful combination.

Companies can now ensure in real time that their vehicles are on their designated optimal route; they are being driven safely and in a fuel-efficient manner; fuel purchased by the driver is commensurate with distances travelled; drivers are not making unauthorised stops; and that the vehicle engine is running optimally with full details provided of oil levels, RPM and a host of other advanced diagnostics. If the vehicle is stolen, Pointer’s systems ensure this is discovered quickly and location information is provided to recovery services. Similarly, if the vehicle is involved in a collision, the data collected from driver monitoring and advanced telematics protects the company from false claims. Pointer is also able to integrate its platform into new clients’ existing systems to work with their ERP, CRM, staff planning software, etc. In specialist businesses such as cold chain distribution, the group’s new sensor technology is also able to ensure optimum performance. This in turn leads to lower fleet running costs as well as savings in insurance and equipment downtime.

DBS technology in fleets monitors drivers’ actions to increase safety, reduce costs and increase efficiency. It is already in quite widespread use with younger insured drivers in the UK and the US. In a fleet context, it has demonstrated significant benefits in the areas of driver safety, compliance with vehicle use/hours worked regulations, reduced fuel, maintenance and insurance costs and lower emissions (see Pointer’s case study example, Exhibit 3). In the ride-hail industry, in addition to the above benefits its use to rate drivers is also a powerful marketing tool. We believe that these benefits make it almost certain to become a standard feature of fleet management and ride-hail networks over the next decade. Based on recent statements by EU and US regulators, we also see strong prospects for its use in fleets to start to become enshrined in regulation in major markets over the next few years, further boosting demand.

To date, in the year that the group has been marketing its driver-monitoring technology, Pointer has already gained three new significant contracts: a ride-hail contract for a US insurance company using its own and Mobileye technology, and driver-monitoring contracts using entirely its own technology for FEMSA, the largest global Coca-Cola bottler, located in Mexico, and Fibria, the global leader in hardwood pulp, located in Brazil.

In January 2017, Pointer Telocation, together with autonomous driving pioneer Mobileye, won a five-year driver behaviour monitoring contract in the US to provide driver-monitoring services to ride-hail companies in New York City. The client was the American Transit Insurance Company, the leading commercial insurance provider for hire vehicles in New York City. This was a significant achievement as that was Pointer’s first major driver-monitoring contract and also its first significant US SaaS contract. To win the contract, Pointer integrated its intelligent fleet management, tracking and driver behaviour analysis technology with Mobileye’s system which registers instances of dangerous driving (eg speeding/hard braking). In addition to providing real-time information and mapping the position of drivers, the system provides real-time alerts to dangerous driving and potential problems such as drivers working excess hours, etc. Pointer’s system also generates driver scores based on the frequency and seriousness of alerts generated by Mobileye’s system.

The contract should open the door to further work with ride-hail and taxi fleets. In the absence of acquiring its own camera-based, driver-monitoring technology, we expect Pointer to continue to partner with companies such as Mobileye to provide driver-rating services. This is because camera systems are able to detect some levels of poor driving, such as driving too close to the vehicle in front, which Pointer’s telematics systems cannot at the present time. Nevertheless, with a number of companies besides Mobileye offering similar services and the potential for Pointer to team up with other partners with similar technology to Mobileye, we don’t see Pointer as reliant on Mobileye for its future expansion in the area.

In February 2017, Pointer won a contract to provide advanced fleet management and driver monitoring system services to FEMSA, the world’s largest Coca-Cola bottler. One year on, in February 2018, the company won a further contract for another advanced fleet management contract in Brazil with Fibria, the world’s largest manufacturer of hardwood pulp for use in paper.

Coca-Cola FEMSA operates in four territories of Latin America, containing countries including Mexico, Brazil, Costa Rica, Columbia and Argentina, and the Philippines. It had, as of November 2016, a combined fleet of 16,650 trucks, serving 63 plants and 327 distribution centres. Pointer’s work with FEMSA’s Mexican operation helped the company to refine its fleet management tools, which was instrumental in the awarding of the pilot. Developments included:

The pilot contract commenced in Mexico but has been since rolled out to more operations across the group. The combination of a number of services means that the contract generates a higher than average revenue per user (ARPU) than Pointer’s standard fleet management service.

For the more recently won Fibria contract, Pointer’s systems are installed in trucks transporting wood to a manufacturing plant. The system monitors and analyses over 70 parameters. Savings in fuel and maintenance, as well as safety enhancements sit alongside targets for reductions in greenhouse gasses, which are a key focus for the client.

We see driver monitoring as a significant growth driver both from new contracts and RPU expansion in the core fleet management business. We understand that the addition of driver monitoring services has the potential to double service revenues per fleet management subscriber in those contracts, which we calculate at $18.1 in 2017. At the same time, the inclusion of driver monitoring in the service bundles of new customers should lead to significantly higher new-customer RPUs. As the US ride-hail contract demonstrated in 2017, offering the right service over the cloud also enables the group to enter new markets on a profitable basis.

CC is the use of a device in a vehicle to connect it to the wireless ecosystem and provide services in the area of safety, navigation, infotainment, communication, vehicle diagnostics, autonomous driving and e-commerce/payments. Gartner predicts that 250m cars, or approximately one-in-three vehicles on the road will be connected by 2020. PWC estimates a 29% CAGR in the CC market in 2015-2020 to $113bn, with CC responsible for $1,800 or 6.9% of the cost of volume model cars by 2022. In December 2016, BI Intelligence forecast a 35% CAGR in the installation of CC technology in new cars to reach 94m by 2021, representing 82% of total car production.

A recent survey by BearingPoint consultants showed that 32% of respondents saw the CC as an important or main reason to buy a particular car, with a further 27% saying that it contributed to the decision to purchase a car. Overall, while safety and navigation benefits of CC technology are fairly widely appreciated, this survey showed that there was a high degree of stickiness to services after they had been trialled. The implication from this is that demand is likely to take off very rapidly once a certain level of familiarity is reached. This stickiness point is perhaps demonstrated best by recent comments by GM, which was the first to introduce CC into vehicles in 1996, that in-vehicle technology is now proving more than three times as important as fuel economy for many customers. Government mandates to install telematics and the expansion of usage-based insurance should also add to demand in coming years.

We see three distinct market segments for CC technology: OEMs (vehicle manufacturers), the ‘new car’ aftermarket, where the technology is offered to buyers of new cars by dealers or manufacturers, and the ‘classic’ aftermarket where the product is installed after the car has left the showroom.

Two factors hindering the implementation of CC technology in new cars are the long lead-time required to retool auto lines, and the fact that the typical new car buyer in the US is over 50 years old (CE Survey) and therefore significantly less interested in CC technology than younger drivers. We have forecast sales of CC modules to OEMs based on 2016 forecasts by BI Intelligence of penetration of CC technology rising to 82% of total car production by 2021, our own forecast of this rising to 98% by 2023 as consumers put greater value on the technology, updated OICA car sales data and AlixPartners’ car sales growth forecasts (see Exhibit 6). This gives rise to estimates of a 24% CAGR in CC units shipped to OEMs from an estimated 37m in 2018 to 109m in 2023.

We have estimated ‘new car’ aftermarket demand employing an assumption, reflecting the age of new car buyers and the high proportion of sales in less developed markets, that 30% of new car buyers will choose to upgrade new vehicles (built without CC technology) to CC technology (see Exhibit 7). This assumption leads to an estimate of the market peaking at c15m units in 2019 before falling away sharply after, as fewer cars leave auto production lines without CC technology.

For the ‘classic’ aftermarket, we see the high proportion of used car buyers of millennial and younger ages as a key driver. This segment is most interested in CC technology but the least able to afford new cars so they should be a source of major demand for upgrading used cars. Our two demand scenarios in Exhibit 7 assume that each year consumers update 7% of all cars built without CC technology that are up to five or eight years old with aftermarket CC products. This results in sales in this segment of the market peaking in around 2021 at c 15m and c 30m units, respectively, and falling back out to 2026 as the long tail of unconverted cars is processed.

At present, the market for CC software is fragmented and there is no clear prospective leader. Nevertheless, we expect many consumers to opt for systems that integrate the data from their CC devices into their smartphones, given the increasing numbers of devices managed through smartphone apps. This is likely to give the gateway firms such as Apple, Google and Baidu strong positions in the consumer subscription market and make it difficult for non-B2C-oriented firms such as Pointer to compete.

Nevertheless, this does not preclude Pointer from reaching a supply arrangement with one of these conglomerates, given its CC expertise or building market share for its app in less smart-phone dominated B2B spaces such as fleet vehicles used by employees in and outside the workplace.

In 2017, Pointer added CC to its Internet of Vehicles offering. The product consists of a hardware unit containing software and wireless connectivity, which is connected to the vehicle’s electronics and an app for linking output to mobile devices as well as an optional screen for installation in-vehicle. Pointer’s system provides access to Wi-Fi, radio and access to a library of approved apps, location-based services, navigation, accident detection and real-time support, parking, 24-hour access to services and an emergency control room and car maintenance. In future, we expect the group to add further services such as driver monitoring, which it already offers fleet users.

At present, PNTR’s two CC contracts fall into the ‘new car aftermarket’ segment and the company has already won two major contracts on this basis in Israel and India for its technology (see below). Management is nevertheless actively looking to expand into the supply of systems directly to OEMs for factory installation in new cars, which will dramatically increase sales potential, while also bringing in more competition from larger players. We also see the potential for Pointer to expand sales in the classic aftermarket as it grows. However, in the absence of concrete indications of OEM interest in PNTR’s systems, we have not incorporated assumptions of sales to OEMs into our forecasts. Based on our forecasts of the unit sales potential of each contract and using a notional $80-100 charge for the hardware unit, we estimate potential annual sales of $1.9m by 2020, rising to $2.3m in 2022 helped by growing sales to India.

Israel car importer aftermarket: In September 2017, Pointer won a contract to provide its hardware and app CC solution to the Israeli car importer, the David Lubinski Group, the sole importer of Peugeot, Citroen, DS and MG vehicles. The use of Pointer’s app means that it is looking to generate dollar-based, double-digit monthly subscriptions revenue from users (paid three years upfront) as well as revenues from hardware sales of c $100/unit. According to the trade association of Israeli car importers, the David Lubinski Group imported over 14,000 vehicles into Israel in 2016. We estimate that Pointer could achieve annual sales of 3,400 units in 2018 assuming that 60% of Lubinski’s cars are imported without CC installed by the OEM (in line with the global assumptions above) and 30% of buyers choose to take the CC option. This proportion of buyers taking up CC is higher than the 30% global assumption employed in Exhibit 7, reflecting the relative affluence and youth of consumers in Israel and our belief that they have reason to place a higher premium on in-built security systems and emergency assistance services as well as having above-average propensity to adopt new technology.

Nissan India: In December 2017, Pointer announced a contract to supply a CC hardware unit to Nissan India for installation in its new cars as an optional add-on. Branded Nissan Connect, the system connects with the driver’s mobile phone to provide a range of services including car location services (such as tracking, alerting when outside a set area or used outside a set time), service and roadside assistance, trip planning, voice assistance alerts, fuel efficiency and car maintenance features. Nissan sold 12,600 cars in India in 2017 (source: Team-BHP), but 2017 was a difficult year for the manufacturer, with sales declining 12% and its market share shrinking from 0.52% to 0.37%. Nissan sells a range of sports, SUVs, commercial and 4x4 vehicles and is heavily promoting Nissan Connect as a sales feature. In our forecasts we assume 70% take up this year, rising to 80% in 2019 and 2020 as the feature becomes more standard. This gives rise to sales of 9,000 units this year and 10,700 and 11,200, respectively, in 2019 and 2020, translating into total CC forecast revenues of c $1.5m in 2019. We note that in the Nissan contract there is no ongoing revenue component for Pointer, as the app, which will be the interface with the driver’s mobile device, is to be provided by InfoTrack Telematics, a Singapore-based specialist in telematics mobile applications.

The use of connected sensors to track, monitor and protect cargoes has been transformed over the past three years by the increasing sophistication and range of available sensors and advances in the functionality of cloud-based interfaces.

MarketsandMarkets estimates the market for tracking and monitoring solutions to reduce inventory and stock management costs reached $9.4bn in 2015 and forecasts it to grow at a CAGR of 15.2% to $25.6bn by 2022. Mobile Experts forecasts a 22.7% CAGR in the revenues from cloud-based IoT asset-tracking devices to reach $7.5bn in 2022, based on the expectation that approximately half of the forecast 70m devices in use will transmit their data through a cloud-based service.

In early 2016, Pointer officially launched CelloTrack Nano, which provides sensor-based, real-time monitoring of cargoes and personnel. Multiple sensors wirelessly communicate with a local hub, which transmits the collected data via satellite, 2G or 3G cellular networks to Pointer’s remote back-office management. Actionable data is then delivered to customers’ platforms (see Exhibit 8).

The systems can be adapted for use in a wide range of situations, but four broad use cases are worth discussing at present. Cold chain monitoring provides real-time updates of temperature and humidity levels for sensitive cargoes, which, in the case of CelloTrack Nano, comply with the strictest level of cold chain regulations (EN 12830 for food and GDP for pharmaceuticals). In logistics and security, the systems can provide real-time verification that high-value goods in transit are not deviating from a planned route, not being accessed at the wrong address and have not been dropped or shaken. In rental equipment monitoring, the sensors provide actionable feedback on asset location, shocks to rented equipment, equipment being moved unexpectedly (sensing movement/vibrations) and changing door status. In lone worker protection, the system monitors staff well-being through the use of panic buttons, accelerometer and inactivity detectors to detect falls by personnel. These systems can also monitor worker location, health and general activity.

Savings generated by the systems include reduced stock loss and product wastage, reduced insurance costs and/or product rental charges, lower costs of managing and securing assets and increasing employee safety/reducing downtime.

There are currently more than a dozen major players in the segment, although the majority are not able to offer the range of sensors and therefore services provided by the CelloTrack Nano system (see Exhibit 9). For this reason, we see the adaptability of PNTR’s technology to provide services across a wide range of use cases as a key competitive advantage. It also offers a high level of certification including compliance with FAA and IATA rules on airborne asset tracking and US certification for cold chain logistics, which speaks for its reliability in critical shipment.

In its logistics and security service, the addition of anti-tampering and fall detection and geo-fencing gives it advantages over a number of players in the field, as can be seen from the comparison of sensor features offered in Exhibit 7. CelloTrack Nano also supports third-party sensors, giving it the ability to further tailor the service to the needs of the client.

Pointer has been encouraged by the development of sales of CelloTrack Nano. Despite not being present in the US market, Pointer was recently awarded an ongoing $2-3m order for its systems from the US. Pointer’s highly successful mobile assets management franchise gives it a track record of remote data management and back office services, which should support the offering of CelloTrack Nano-as-a-Service, which the group intends to launch this year. Helped by this, we see the potential for 2018 to see a significant growth in CelloTrack Nano’s revenues as the group’s two years of track record and marketing efforts translate into new orders and larger order sizes.

The management team at Pointer Telocation is headed by David Mahlab, who has been president and CEO since 2011. Mr Mahlab was the co-founder, CEO and chairman of Scopus Video Networks and holds an MSc in electrical engineering as well as an LLB and an MBA from Tel Aviv University. CFO Yaniv Dorani joined Pointer in 2008 and was appointed CFO in April 2017. Prior to joining Pointer he had been employed at Medis Technologies, Delta Galil Industries and KPMG. CIO Rami Peled has been with Pointer since its foundation in 1998 and served as VP IT of Shagrir Systems (divested in June) as well as being a specialist in organisational systems including ERP, CRM and billing. VP sales and marketing Joshua Rozanski is responsible for the sales, marketing and technical support teams as well as Pointer’s subsidiaries in the US and India. A qualified electrical engineer and MBA, Mr Rozanski has a background in sales at analytics and optimisation software firm TEOCO and fibre-connectivity firm Packetlight Networks.

We summarise the key sensitivities for Pointer as follows:

Pointer’s shares currently trade on a prospective 2018 EV/EBITDA of 7.9x, or a 19% discount to the telematics sector. We have increased our valuation for Pointer based on peer comparison from $19.3 (NIS67.8) to $20.8 (NIS71.8) per share. This has arisen from a cut in the discount applied to median market EV/EBITDA multiples for FY1 and FY2 from 7% to zero, offset by some softening of share prices in the sector since our last valuation. Applying the median EV/EBITDA multiples of 9.8x (FY1e) and 8.3x (FY2e), respectively, to the group metrics and averaging them, gives rise to our revised valuation. Our reduced discount rate reflects our belief in the improvement in Pointer’s earnings prospects over the last year as well as its underlying quality of earnings arising from the deployment of more advanced services in the market. We also believe that the stock is likely to attract increasing interest from institutional investors in the coming year as contract wins arising from new products attract more attention.

In our DCF valuation, we have maintained our previous WACC (10.2%), TGR (2.5%) and RFR (6.6%) assumptions but our valuation has increased from $18.1 (NIS63.6) to $21.0 (NIS72.5) per share as a result of the increase in our cash flow forecasts arising from our earnings revisions.

During 2017, SaaS subscriber numbers grew 16% to 258,000, with organic net additions growing from 26,000 in 2016 to 35,600 and the addition of 2,400 subscribers in Q417 from an acquisition (2016: 16,000). Recurring service revenues grew 25% to $52m, or 66% of total group revenues. This reflected acquisitions in core markets in 2016 and 2017 and a 2.6% increase in average revenues per user (ARPU), helped by increased numbers of services sold to customers and currency appreciation against the dollar in Israel, Brazil and Argentina. Product revenues grew 15% to $26m after a weak Q4 in which revenues dropped 6% y-o-y to $5.5m on destocking by US customers of 3G connected units, ahead of the move to LTE this year.

The gross margin on service revenues widened 2.7 percentage points to reach 57.8% in 2017 reflecting the impact of operating leverage under the cloud-based model.

We have trimmed our revenue and EBITDA forecasts for 2018 on more conservative service ARPU assumptions reflecting the potential for the positive currency trends in 2017 to turn mildly negative. We have nevertheless increased our EPS assumption on the back of an expected reduction in the effective tax rate arising from the expected use of deferred tax assets created in 2017. We have increased our 2019 revenues and EBITDA forecasts to incorporate our assumptions of increased revenues in the CC and driver monitoring space following successful order generation in 2017.

Pointer Telocation’s management recently announced a 3-5 year target of a doubling in revenues (including acquisitions) and an increase in the group EBITDA margin to 25%. Our revised forecasts, which do not take potential acquisitions into account, anticipate revenues growing by a lower 72% between 2017 and 2022 (a CAGR of 11.4%). We nevertheless see good potential for management to achieve its targets through a continuation of its existing record of value-accretive acquisitions. In terms of the group’s capacity for acquisition, with only $2.7m in net debt at the end of 2017, there is significant potential to fund acquisitions with debt. We note that the group could spend $29m in outlays on acquisitions, and still keep gearing at a moderate 50%. Assuming acquisitions can be achieved in line with current sector EV/revenue multiples of 1.7x for stocks with market capitalisations below $300m, this would have the potential to add $50m to group revenue. This in itself would give rise to an additional 64% uplift from 2017 revenues, giving a total of 136% over the next five years (a CAGR of 18.7%) or 106% over the next three years (a CAGR of 27.2%) based on our existing forecasts. We would expect synergies from the acquisitions and operating leverage from the resulting subscriber growth to provide an additional boost to EBITDA margins.

We see the key earnings drivers for the group in 2018-20 as:

Pointer generated $10.7m in net operating cash flow before interest expense in 2017, up from $10.1m the previous year. With a fallback in outlays on acquisitions to zero (excluding $1.2m in assets and subscribers acquired from a competitor) after $8.5m in 2016, and PPE/intangible outlays of $3.3m (2016: $ 4.2m) easily financed by operating cash flows, the group was able to generate $6.7m in free cash flow and repay $5.1m in debt. Barring acquisitions (which we do not build into our model), we expect the group to remain cash-generative over our forecast period to 2020, helped by rising cash generation from subscriber growth, the benefits of operating leverage and broadly maintained levels of capex.

Pointer Telocation has a strong balance sheet, with net debt of $2.7m at end 2017, representing a debt/equity ratio of 4%, helped by restrained acquisition activity in 2017 and strong cash flow generation in the core business. We believe that this and the group’s disciplined approach to acquisitions, makes it well positioned in the event of a downturn in markets to generate free cash flows and to potentially generate additional value for shareholders by acquiring businesses from distressed competitors. In the absence of major acquisitions, we have assumed that the group will commence paying dividends in 2019 to eliminate surplus cash on the balance sheet. Naturally, if the group undertakes significant acquisitions in the meantime that reduce surplus cash balances, we will adjust our dividend expectations accordingly.