Micronet Enertec Technologies Is Attractive As The Valuation Has Not Caught Up With The Emerging Growth Story

(Editors' Note: This article covers a stock trading at less than $1 per share and/or with less than a $100 million market cap. Please be aware of the risks associated with these stocks.)

Key takeaways

• Micronet Enertec Technologies (MICT) trades at a mid single-digit EBITDA multiple despite strong growth prospects as the market has been slow to re-price the stock in light of a transformative acquisition.


• As a result, MICT is still being valued as a low margin defense supplier rather than a higher margin and faster growing provider to the mobile resource management market.


• The downside is limited by the high insider ownership and net cash position that represents 30% of the market cap.

Company overview

MICT operates through two segments:

Micronet operates in the commercial mobile resource management (or MRM) market and sells rugged mobile computing devices for fleet operators and field workforces.

Enertec Systems 2001 (a wholly-owned subsidiary) operates in the aerospace and defense (or A&D) market and sells customized military computer-based systems, simulators, automatic test equipment and electronic instruments used in command and control as well as missile fire control primarily by U.S. and Israeli defense system integrators.

Extreme company makeover: The new MICT

Investors could be forgiven for not recognizing the new MICT given the multiple "life changing" events over the past 18 months. For example, in September 2012 it acquired 47.5% of Micronet (later increased to ~54%), in March 2013 changed its name from Lapis Technologies to Micronet Enertec Technologies and in April 2013 went public.

With only one analyst covering the stock (Sidoti with a neutral rating), MICT has been going on more investor conferences recently in an attempt to increase exposure (e.g. Sidoti conference earlier this month and LD MICRO conference in December 2013). However the growth story remains largely unknown.

In the mrq (click on "read more from pdf" at bottom), revenue rose 111% to $8 million largely due to the Micronet acquisition. Gross profit more than quintupled to $3.6 million from $0.68 million while the gross margin almost tripled to 45% from 18% due to increased commercial production line efficiencies and a higher margin product mix. Operating income rose to $1.2 million from a loss of $0.11 million.

The MRM segment should act as the primary catalyst given the previously mentioned high portion of overall revenue and due to the fact that its operating margin of 23.9% is ~9x the 2.7% for the A&D segment.

This segment continues to post impressive growth due to increasing demand for its products that increase workforce productivity and corporate efficiency by providing fleet operators (e.g. trucking, public transport, construction, rental car companies, municipalities, public safety) with critical data on vehicle location, fuel usage, speed and mileage through increasingly popular mobile devices.

Source: Company presentation

According to The Driscoll Licht Report, in the U.S. (the primary market for Micronet) there are ~5.7 million mobile data devices in service in MRM systems, which is projected to grow to ~9 million by the end of 2015 while the fleet penetration rate is projected to grow to ~27% by 2016 from ~15% in 2011.

There are three company-specific factors that should provide additional growth. First, MICT is expanding into Europe with new relationships with tier 1 customers. The global opportunity is even greater than the domestic one (which is saying something). For example, the same report estimated that in 2012 there were ~13.8 million global subscribers to MRM services, which is projected to more than double to ~32 million by 2016 while the penetration rate is projected to double to 14%.

Second, the local fleet market represents a significant "greenfield" opportunity given that it is the largest and fastest growing MRM segment (MICT added new value added resellers specifically for this segment).

Third, MICT continues to roll out product upgrades, which should help maintain the high proportion of advanced devices (90%) that offer the most functionality at the highest price. Moreover, the new patent-pending Guardian System Design is an integrated software and hardware system that includes a cloud-based SaaS service feature, which should provide a growing recurring revenue stream.

Although the A&D segment should act as a secondary (and minor) catalyst, this segment is still "pulling its weight." For example, in addition to the strong and increasingly diverse backlog, subsequent to the end of the quarter MICT announced a $4 million order relating to a missile defense system. Moreover, customers who placed two awards within the past year (e.g. $2.6 million in November 2013 and $1.4 million in October 2013) indicated there may be follow-on orders. Furthermore, there is greater revenue visibility than might be expected given the uncertainty regarding defense spending as its products are core components of long-term military programs with expected lifecycles up to 10 years.

The expansion into the large (and growing) Indian defense market should provide additional growth via its joint venture with Amtek Defense Technologies

Valuation

MICT is attractive as it trades at a significant discount to its growth prospects and closest publicly traded peer Garmin (many of the primary competitors are private). Moreover, its largest customer TRMB has a multiple >4x higher. Granted a direct comparison is not entirely relevant given the customer-supplier relationship, however, it does help prove the bullish case for MICT (rather than the bearish one for TRMB). Moreover, MICT supplies proprietary and critical products used by its customers and is not merely a distributor or supplier of low margin commodity parts.

As previously mentioned, the low valuation is largely due to the virtual lack of coverage and understanding of the growth story. As a result, MICT is still being valued as a low margin A&D supplier rather than a higher margin and faster provider to the mobile resource management market. This is a positive because it creates the opportunity in the first place. Going forward, it should be easy to beat expectations as there frankly aren't any.

A secondary reason for the low valuation may be fears of a large acquisition that results in significant dilution or a higher debt load given that the growth strategy includes "potentially larger scale transactions" in order to meet the goal of 200% growth by 2016. However this fear is largely unwarranted for two reasons. First, the Micronet acquisition highlights the deal savvy management. For example, MICT recorded a $4.6 million gain on the acquisition as the fair value of the assets exceeded the purchase price. Second, MICT is in a position of strength in terms of deal making ability given its net cash of $9.1 million, which represents 30% of the market cap.

Risks

The following are the primary stock-specific risks (in addition to the general and obvious risk of lower spending on mobile resource solutions or defense) in order of importance:

• Three customers account for ~86% of revenue in the YTD period with a large portion of this from TRMB, who acquired another customer PeopleNet in July 2011.


• There is a risk of future dilution or increased debt load in the event of a large acquisition.


• MICT is exposed to foreign currency losses as revenue is primarily in USD while expenses are primarily in NIS.

Conclusion

The target price is based on a 7x multiple using annualized YTD EBITDA of ~$5.8 million. This is conservative as it assumes no EBITDA growth and represents a significant discount to GRMN.

The stop loss should be placed below the recent support at ~$5, which is ~4% below. The time frame is 12-24 months as it will take more time for investors to become familiar with the story and due to the fact that the primary catalyst is based on a multi-year growth trend.

Source: Micronet Enertec Technologies Is Attractive As The Valuation Has Not Caught Up With The Emerging Growth Story

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. (More...)

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