Pender Small Cap Opportunities FundBSM (TSXV: "GPS") is a hardware and software provider for commercial fleet tracking and asset management focusing on key verticals including rail, construction, government and service (utility, security, trucking).
The company is an industry leader with an attractive valuation and the upside of potentially being acquired. It’s a global leader in its key verticals such as the rail industry and has all seven of the Class 1 railways as customers. Its merger with Webtech in late 2015 is a game changer. The merger expanded BSM’s vertical and geographic footprints and catapulted the company into the top 20 commercial fleet telematics providers globally. Post-merger, BSM effectively doubled revenue to $60 Million, reduced costs by $4-$5 Million through cost synergies and moved its EBITDA margin up to around 15% from the low single digits.
BSM has continued to strengthen its core business by consolidating into one software platform and one hardware platform. It is also working on becoming more software focused and hardware agnostic. The company acquired Mobi in October 2016, adding higher margin recurring revenue on analytics to its subscription revenue. At the end of Q3 (June 30, 2017), BSM had 161,000 subscribers and approximately 70% of its revenue was recurring.
As BSM consolidates, organic growth has been slower. However, the company is starting to gain traction in converting its sales pipeline into revenue, especially in the rail and government sectors. Notable recent successes include a government agency signing monthly subscriptions for a potential fleet size of 6,000 vehicles, a Tier 1 rail customer adding 1,500 subscribers, and ongoing orders from the Company’s largest construction customers.
While the sales pipeline is growing, the churn rate is stabilizing. BSM’s churn rate was abnormally high in Q2 due to the 2G/CDMA shutdown of AT&T (NYSE:T) in the US, but it returned to 9% in Q3, a more normal annualized rate. Another 8,000 subscribers are potentially at risk as a result of the 2G/CDMA turndown in Canada: roughly 4,000 will drop off in 2018 and the remaining 4,000 subscribers will go by 2020
BSM is in the early stages of working through these subscribers and it is likely that some of them will return. In the US, around 1,000 customers returned out of the 10,000 estimated subscriber losses. Gross subscription “adds” from increasing new business will also offset some of these subscriber losses.
The stock is trading at 1.6X revenue and 12X 2018e EBITDA at consensus estimates, a discount to its peers. Recent telematics transactions point to higher valuation multiples - Verizon (NYSE:VZ) acquired Fleetmatics at 6X revenue and 18X EBITDA forward multiples. Given the involvement of activist investor Crescendo (with over 10% ownership) and BSM’s increased scale, it is more likely to become an acquisition target itself for financial and strategic buyers.
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