Black box tracking technology supplier Quartix (QTX:AIM) has scope to beat conservative expectations this year as it gears up for a rapid growth phase.

With a large UK business and a smaller operation in France, the company has now broken the seal on expansion in the potentially huge US market that is many times the size of the UK.

What does it do?

Quartix designs and supplies the clever, connected black boxes that sit in vehicles and allow all sorts of data to be linked to a control centre for analysis via the company’s cloud-based analytics platform.

Its main opportunity is connecting fleets of vehicles, such as supermarket trucks transporting goods to stores or parcel vans making deliveries.

It also supplies insurance companies although this has become less of a focus because the work is unpredictable in nature while putting pressure on operating margins. In contrast, fleet customers tend to use the company’s services for years at a time.

Analysts estimate average customer lifetime value, with nine vehicles as an example, of between seven and 10 times the initial customer acquisition cost (about £1,000).

In real terms, a relationship could run for even longer given the difficulty and expense of switching telematics providers across a large vehicle fleet.

In this example customers pay about £1,500 a year on which Quartix’s running cost is about £100 to cover mobile network arrangements.

Sticky customers

Fleet customer attrition is next to nothing. Some operators might 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 additions rose 19% to 87,000 overall in 2016, showing UK operations up 14% to 71,000 vehicles, France 26% ahead to 10,000, while US subscriptions jumped 95% to 6,000. That demonstrates the scope for rapid growth in the US where Quartix is building from a low base.

The change in target market strategy means analysts expect little or no growth this year before picking up again in 2018, although we believe management have been deliberately over-cautious.

Earnings growth in the mid-teens is anticipated next year. Quartix is also robustly cash generative, throwing off about £7m a year.

We believe this to be a high quality business sensibly throwing its resources behind its best opportunities, a strategy that could see the shares go beyond past highs of 465p. (SF)

Quartix  (QTX:AIM) 385p

Stop loss: 308p

Market value: £181.6m

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