Today's 5% share price sell-off in telematics black box designer Quartix (QTX:AIM) looks a little harsh. The firm's trading update is largely good news, putting more resources behind its best growth opportunities even if that may mean capping near-term progress.
For 2016 revenue growth of 15% to £22.6m is confirmed with profits 'in line with market estimates.' That implies adjusted EBITDA (earnings before interest, tax, depreciation and amortisation of £6.8m, 9% better than 2015. But the strategic insurance-to-fleet switch means that the company is guiding for a largely flat 2017.
Quartix designs and supplies the clever, connected black boxes that sit in vehicles and allow all sorts of data to be up-linked to a control centre for analysis.
Insurance slowdown
The market is focusing on slowing growth in the insurance market.
'New unit installations in the insurance sector grew by 22% to 69,000 vehicles,' the company tells us. That's during 2016. 'Despite this growth, installations in the second half were 13% lower than in the first half.'
This should not be a surprise. Drivers are fickle and motor insurance, largely, a commity. How often do you change your provider? Many switch every year, chasing the best deal. That means every year there is the potential for drivers using Quartix kit could switch away to insurers that do not. This is unpredictability is the very reason why Quartix announced in July that it would spend less effort on this market and concentrate on fleet operators, and particularly in the US.
Good news
This is exactly what the company should be doing, and investors should be pleased that management are strategically ahead of the curve. Fleet operators are a much more predictable customer base. Sure, some might feel the need to downsize the number of vehicles through the economic cycle, but such decisions are likely to be better flagged and easier to manage.
Fleet subscription adds rose 19% to 87,000 overall, showing UK operations up 14% to 71,000 vehicles, France 26% ahead to 10,000, while the small US unit subsriptions jumped 95% to 6,000. That demonstrates the scope for rapid growth in the US.
Quartix is also not exiting insurance. It is sensibly going to be more picky about how much resource it commits to chase new business, and select only the better margin contacts that come its way.
Insurance is 'a market where there is pressure on margins and where customer churn is exceptionally high, confirms Megabuyte analyst Lee Prout. 'We therefore support the company’s decision to focus on its fleet operations, even if there is a short-term impact on headline growth.'
De-risking
Shares explained in August 2016 that only faultless execution of the business will keep the share price at the 375p levels they traded at then given the near-29 forward PE. The stock actually rallied to 465p later that month. Now they are back down at 285p.
By steering market expectations lower for 2017 Quartix is both capping downside risk and leaving the door ajar for outperformance from its fleet investment.
