smart parking limited (spz-au) 12 april 2019 · smart parking limited (spz-au) 12 april 2019...

Smart Parking Limited (SPZ-AU) 12 April 2019 Initiating Coverage Speculative Buy Key Thoughts $0.125

Adam Dellaverde

[email protected]

+618 8217 3923

Summary Market capitalisation (m) $44.3

Enterprise value (m) $30.9

Share price $0.125

Intrinsic value estimate $0.25

52 week high $0.56

52 week low $0.10

Ave Monthly Vol (year rolling) 0.497

Key Statistics (A$ million)

Period 1H19

Act.

FY19

Est.

FY20

Est.

Revenue ($m) 14.3 30.3 38.2

Adj.EBITDA ($m) 0.5 1.5 4.3

Adj. NPAT ($m) (0.57) (0.02) 1.55

Sig. Items (post-tax) 0.01 0.01 0.00

Reported NPAT ($m) (0.58) (0.03) 1.55

Reported EPS (c) 0.34 0.43 0.96

Adj. EPS (c) 0.34 0.43 0.96

DPS (c) 0.00 0.00 0.00

Adj. PE Ratio -39.7 n/m 28.9

EV/Adj. EBITDA (x) 33.0 21.0 7.2

Share Price Graph (A$)

SPZ is a parking management and technology company with the prospect of excellent economics if it can grow to become a scale operator. Eighteen months ago, this was all but achieved following its maiden profit result. During FY18 unforeseen problems in UK operations required a management reshuffle and a reset of the business model. Improved quality controls and additional overheads have since weighed on profitability, albeit site growth has remained robust and cash flows have remained positive.

We believe the attractive features of the business remain in place. The board includes accomplished businesspeople who own around one-third of the equity. Addressable markets are sizeable and growing and the balance sheet is strong with excess cash reserves. Established competitors have long-term records of profitability and one was recently acquired at a high-teens EBITDA multiple. Recent history is tarnished by missed earnings guidance, site losses and deterioration in key metrics. This could present a buying opportunity, in our view.

We maintain the Parking Management business still offers prospects for attractive returns. Assuming net site growth and tickets per site are maintainable, we expect SPZ to return to profitability in FY20. The strong balance sheet and heightened M&A activity offer some downside protection. Should the turnaround endure further setbacks, we believe the board could instead realise value by seeking out acquirers. In our view, both business units are attractive bolt-on targets.

Valuation & Recommendation

Our preferred valuation methodology separates the two divisions on a sum-of-the-parts basis. We arrive at our valuation using FY21 estimates at which point we anticipate the turnaround to be completed. We try to compensate for duration risk by applying a modest earnings multiplier. We also allocate group overheads to Parking Management operations to reflect additional costs borne as a stand-alone entity.

Our sum-of-the-parts analysis generates an intrinsic value estimate of $0.25 per share. Parking Management and surplus cash assets comprise roughly 90% this value. This compares favourably to the current price of $0.125. Should our estimates prove broadly accurate, we think SPZ offers the potential for attractive returns. Nonetheless, our estimates assume a successful business turnaround. While we have tried to accommodate added risk through conservative inputs and earnings multipliers, we acknowledge SPZ remains a largely speculative investment. We initiate coverage with a Speculative Buy recommendation.

$0.00

$0.10

$0.20

$0.30

$0.40

$0.50

$0.60

SPZ-AU XSO

Smart Parking Limited (SPZ-AU) of 26

12 April 2019

Contents

Financial Estimates .................................................................................................................................................. 3

Management and Director Profile ........................................................................................................................... 5

Board of Directors ............................................................................................................................................... 5

Key Management Personnel ............................................................................................................................... 6

Analysis of Operations ............................................................................................................................................. 7

Parking Management .......................................................................................................................................... 8

Protections of Freedoms Act (POFA) ............................................................................................................... 8

Legal Enforceability of PBN’s at Common Law ................................................................................................ 9

The Parking (Code of Practice) Bill ................................................................................................................. 10

The Industry ................................................................................................................................................... 11

Company economics...................................................................................................................................... 12

SPZ’s Revenue Mix ......................................................................................................................................... 14

Modelling earnings ........................................................................................................................................ 15

Technology Segment ......................................................................................................................................... 17

Parking Sensors .............................................................................................................................................. 18

Sensor Technology ......................................................................................................................................... 18

On-street Market ........................................................................................................................................... 19

Off-street Market .......................................................................................................................................... 20

Estimating market size................................................................................................................................... 20

Segment Financials ........................................................................................................................................ 21

Balance Sheet and Capital Management .......................................................................................................... 23

Valuation & Recommendation .......................................................................................................................... 24

Risks ................................................................................................................................................................... 25

Disclosures ......................................................................................................................................................... 26


12 April 2019

Financial Estimates

Smart Parking Limited - Summary of Forecasts SPZ-AU $0.13

PROFIT & LOSS SUMMARY (A$ m) BALANCE SHEET SUMMARY (A$ m)

Pe riod FY17 A FY18 A 1H19 A FY19 E FY2 0 E FY2 1E Pe riod FY17 A FY18 A 1H19 A FY19 E FY2 0 E FY2 1E

Ne t re ve nue 2 4 .4 3 1.0 14 .3 3 0 .3 3 8 .2 4 6 .0 Cash 14.2 7.2 11.5 12.6 12.3 14.1

CODB (23.6) (27.0) (13.8) (28.8) (34.0) (38.9) Financial Assets 0.0 6.5 2.2 0.0 0.0 0.0

Adj. EBITDA 0 .8 4 .0 0 .5 1.5 4 .3 7 .2 Receivables 5.7 8.1 6.4 7.0 8.8 10.7

Significant items (pre- tax) (0.4) (0.0) 0.0 0.0 0.0 0.0 Inventory 1.5 1.5 1.1 1.2 1.6 1.9

Sta t. EBITDA 1.2 4 .1 0 .5 1.5 4 .3 7 .2 Other 0.0 0.0 0.2 0.0 0.0 0.0

D&A (2.4) (2.0) (0.9) (1.8) (2.3) (2.4) Tota l Curre nt Asse ts 2 1.4 2 3 .2 2 1.4 2 0 .8 2 2 .7 2 6 .6

EBIT (1.1) 2 .1 (0 .4 ) (0 .3 ) 2 .0 4 .7 Intangibles 2.4 1.9 1.9 1.9 1.9 2.0

Net interest income/(expense) 0.1 0.3 0.1 0.2 0.2 0.2 DTA 1.2 0.6 0.3 0.0 0.0 0.0

Pre - Ta x Profit (1.1) 2 .4 (0 .3 ) (0 .0 ) 2 .2 4 .9 Other 0.4 0.5 0.4 0.4 0.5 0.6

Tax Expense (0.3) (0.7) (0.2) 0.0 (0.7) (1.5) Total Non- Current Assets 3 .9 2 .9 2 .6 2 .3 2 .4 2 .6

Re porte d NPAT (1.4 ) 1.7 (0 .6 ) (0 .0 ) 1.6 3 .5 TOTAL ASSETS 2 5 .3 2 6 .1 2 4 .0 2 3 .1 2 5 .2 2 9 .2

Significant Items (post- tax) (0.3) (0.0) 0.0 0.0 0.0 0.0 Payables 4.8 6.2 4.7 4.9 6.2 7.5

Adjuste d Sha re holde r NPAT (1.7 ) 1.6 (0 .6 ) (0 .0 ) 1.6 3 .5 Borrowings 0.2 0.1 0.1 0.1 0.1 0.1

Deferred Revenue 0.7 0.6 0.7 0.6 0.7 0.9

PER SHARE DATA Provisions 0.7 0.9 0.8 1.1 1.3 1.5

Pe riod FY17 A FY18 A 1H19 A FY19 E FY2 0 E FY2 1E Total Current Liab 6 .4 7 .8 6 .4 6 .7 8 .4 10 .0

Reported EPS (c) (0.4) 0.5 (0.2) (0.0) 0.4 1.0 Borrowings 0.1 0.1 0.0 0.1 0.1 0.1

EPS a dj (c ) (0 .5 ) 0 .5 (0 .2 ) (0 .0 ) 0 .4 1.0 Provisions 0.0 0.0 0.0 0.0 0.0 0.0

DPS (c) 0.0 0.0 0.0 0.0 0.0 0.0 Other 0.0 0.0 0.0 0.0 0.0 0.0

Franking n/a n/a n/a n/a n/a n/a Total Non- Current Liab 0 .1 0 .1 0 .0 0 .1 0 .1 0 .1

TOTAL LIABILITIES 6 .5 7 .9 6 .4 6 .8 8 .4 10 .1

KEY SEGMENT DATA TOTAL EQUITY 18 .8 18 .2 17 .6 16 .3 16 .7 19 .1

Pe riod FY17 A FY18 A 1H19 A FY19 E FY2 0 E FY2 1E

Parking Management CASH FLOW SUMMARY (A$ m)

Net revenue 21.0 23.9 11.3 24.3 31.7 39.0 Pe riod FY17 A FY18 A 1H19 A FY19 E FY2 0 E FY2 1E

EBITDA 4 .7 6 .5 1.9 4 .4 7 .3 9 .9 NPAT (1.4 ) 1.7 (0 .6 ) (0 .0 ) 1.6 3 .5

Sites operated at period end (#) 144 236 301 361 481 601 D&A 2.4 2.0 0.9 1.8 2.3 2.4

PBN's issued (000's) 335.1 392.0 187.3 389.9 515.3 662.2 Significant items 0.4 0.0 (0.0) (0.0) 0.0 0.0

Technology Net working capital movement (2.3) 0.0 1.3 0.1 (0.8) (0.8)

Net revenue 3.7 6.8 2.8 5.7 6.3 6.8 Other non- cash 1.5 (0.7) 0.3 0.8 0.2 0.2

EBITDA (2 .2 ) (0 .6 ) (0 .4 ) (0 .7 ) (0 .7 ) (0 .5 ) Ope ra ting Ca sh Flow 0 .6 3 .0 1.9 2 .6 3 .2 5 .3

New sensors installed (#) n/a 13,700 3,945 8,000 8,000 8,000 Capex (P&E) (1.3) (3.3) (1.6) (3.5) (3.3) (3.3)

Annualised recurring revenue 2.1 2.6 1.5 3.2 3.7 4.3 Capex (Intangibles) (0.2) (0.1) (0.1) (0.2) (0.2) (0.2)

R&D spe nding (0 .6 ) (0 .7 ) (0 .5 ) (1.0 ) (1.0 ) (1.0 ) Fre e Ca sh Flow (0 .9 ) (0 .4 ) 0 .1 (1.0 ) (0 .3 ) 1.8

R&D spending % of Tech. revenue 15.7% 10.2% 17.9% 17.4% 16.0% 14.7% Acquisitions 0.0 0.0 0.0 0.0 0.0 0.0

Dividends Paid 0.0 0.0 0.0 0.0 0.0 0.0

D&A (2.4) (2.0) (0.9) (1.8) (2.3) (2.4) Ca sh Ava ila ble for De bt Se rvic e (0 .9 ) (0 .4 ) 0 .1 (1.0 ) (0 .3 ) 1.8

Other corporate items (0.8) (1.2) (0.6) (1.2) (1.3) (1.3) New debt issued/(repaid) (0.0) (0.2) (0.1) (0.0) (0.0) (0.0)

Group adj. EBIT (1.2 ) 2 .1 (0 .4 ) (0 .3 ) 2 .0 4 .7 New equity issued/(repaid) 11.1 0.0 0.0 0.0 0.0 0.0

Ne t Ca sh Move me nt 10 .2 (0 .6 ) 0 .1 (1.0 ) (0 .3 ) 1.8

RATIOS Cash at Period Start 4.1 14.2 7.2 7.2 12.6 12.3

Pe riod FY17 A FY18 A 1H19 A FY19 E FY2 0 E FY2 1E Ca sh a t Pe riod End 14 .3 13 .6 7 .2 6 .1 12 .3 14 .1

EBIT/Sales Margin (%) - 4.7% 6.8% - 2.9% - 0.9% 5.2% 10.3%

NPAT/Sales Margin (%) - 5.7% 5.4% - 4.1% - 0.1% 4.1% 7.5% VALUATION MULTIPLES

ROA (%) - 5.5% 6.4% - 2.4% - 0.1% 6.2% 11.8% Pe riod FY17 A FY18 A 1H19 A FY19 E FY2 0 E FY2 1E

ROE (%) - 7.4% 9.1% - 3.3% - 0.2% 9.3% 18.1% PER (x) (29.4) 27.0 (38.8) (1,301.7) 28.9 13.0

EBIT Interest cover (x) (14.2) 7.6 (6.1) (1.2) 9.4 22.8 PER a dj (x) (24.0) 27.5 (39.7) (2,118.6) 28.9 13.0

Net Cash / (Debt) ($m) 14.0 13.5 13.6 12.4 12.2 13.9 Divide nd Y ie ld (%) 0% 0% 0% 0% 0% 0%

Net Debt : Equity (%) n/a n/a n/a n/a n/a n/a EV/ adj. EBITDA (x) 25.7 7.6 33.0 21.0 7.2 4.3

Dividend Payout Ratio (%) 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% EV/EBIT (x) - 26.9 14.7 - 37.6 - 109.6 15.4 6.5


12 April 2019

Investment Overview

SPZ has an impressive, experienced board of directors and a strong balance sheet. Around half of shares on

issue owned by directors and employees. For a micro-cap company this is an unusual alignment of risk and

reward between insiders and external investors. Markets served are sizeable with solid prospects for growth

and some interesting recent industry M&A. The opportunity exists for significant earnings growth but SPZ’s

history is unfortunately tainted by setbacks from customer losses and execution missteps. FY19 has been a

year of rebuilding and resetting expectations following the removal of UK management in the prior year. We

anticipate a break-even result in FY19 followed by a return to profitability in FY20.

We find it difficult to definitively argue that Smart Parking is undervalued in its present condition; although we

are optimistic the stand-alone businesses could be divested for more than the current market cap. We are

estimating free cash flow generation to re-commence from FY21 at which time EBITDA could be around $7m.

If recent industry transaction EBITDA multiples are a guide, UK parking operations could be worth substantially

more to an acquirer in the next couple of years. We anticipate Parking Management operations will generate

around $10m of EBITDA in FY21 before allocation of corporate overhead and losses from the Technology

business. Should our estimates prove accurate we believe the current share price to substantially undervalue

the business. Nonetheless, we assess the SPZ turnaround as early stage and execution risks are elevated.

We see achievement of our FY21 estimates as contingent upon four key factors:

1) The ability to navigate recently passed UK legislation without adversely impacting site economics,

2) The ability to add new, profitable sites at a targeted rate of 12 net new sites per month,

3) Stabilisation of site churn through significant improvement in customer and community relationship

management, and

4) Effective cost management following a large increase in compliance overhead and salespeople in FY19.

These four factors all relate to the UK Parking Management operations. We don’t believe short term

opportunities for Technology are significant enough to impact the intrinsic value of SPZ over our forecast

period. In our view, M&A may be required for the potential in Technology operations to be realised.

Whilst we are attracted to latent value within the SPZ assets, we think the investment case must be considered

speculative in the context of execution risk and the quantum of changes to the business model over the past

year. Legislative changes and BREXIT also present challenges requiring careful navigation over the next few

months. If this challenging period can be navigated successfully and earnings stabilisation becomes evident,

we see the potential for substantial share price appreciation.


12 April 2019

Management and Director Profile

Board of Directors

Mr Christopher Morris – Non-Executive Chairman

Chris Morris was the founder of Computershare Limited and its Chief Executive Officer from 1990 to 2006. He

remains the non-executive Chairman of Computershare. Mr Morris has worked across the global securities

industry for more than 30 years.

Mr Paul Gillespie – Managing Director

Paul Gillespie was appointed CEO of Smart Parking in January 2013. Previously he led the UK division of Xerox

Parking Services and was responsible for sales, operations and finance functions. Prior to Xerox, Mr Gillespie

was a sales executive for the Stanley organisation specialising in technology products for government and

private sectors.

Ms Penelope Maclagan – Non-Executive Director

Penelope Maclagan joined Computershare in 1983 and has been a director since 1995. She has extensive

experience and knowledge in the securities industry having led Computershare’s Technology Services business

until 2008. Ms Maclagan is a non-executive director of Computershare Limited.

Committee membership: Remuneration Committee (Chair), Risk and Audit Committee.

Ms Tiffany Fuller – Non-Executive Director

Tiffany Fuller is a qualified Chartered Accountant having held various corporate finance, financial advisory and

management consulting positions with Arthur Anderson in Australia, the US and UK. During her time with

Rothschild Australia she was responsible for managing a Microcap fund and was a founding director of a

technology focused venture capital fund. Ms Fuller is a non-executive director of Computershare Limited,

Washington H Soul Pattinson and Company Limited and Costa Group Holdings Limited.

Committee membership: Remuneration Committee, Risk and Audit Committee (Chair).

Mr Jeremy King – Non-Executive Director

Jeremy King is a corporate advisor and a corporate lawyer with over 20 years’ experience in international legal,

financial and corporate matters. Mr King is a director of Orca Energy Ltd and former founding director of Glory

Resources Ltd.

Committee membership: Remuneration Committee, Risk and Audit Committee.


12 April 2019

Key Management Personnel

Mr Paul Gillespie – Managing Director

(See previous page for bio)

Mr Richard Ludbrook – Group Chief Financial Officer and Company Secretary

Richard Ludbrook was appointed Chief Financial Officer in February 2011 and has been with the company since

early 2009. He has over 15 years’ finance and management experience including positions in New Zealand and

the United Kingdom.

Mr Nigel Coltman – UK Chief Executive Officer

Nigel Coltman joined Smart Parking in October 2018 after 13 years in various senior management roles with

NSL Limited, the leading UK parking service provider for government.

Mr John Heard – Chief Technical Officer

John Heard joined Smart Parking in 2015. Based in Smart Parking’s Auckland offices, he leads the company’s

technology development division. Mr Heard holds several degrees in Computer Science and Physics and has

over 20 years leadership experience in technology start-up ventures.


12 April 2019

Analysis of Operations

Smart Parking (SPZ) was originally Car Parking Technologies following a $20.4m reverse-listing of New Zealand-

based Meter Eye in 2010. At the time, Meter Eye provided a suite of car parking technologies to car park

owners in Australia, New Zealand, Singapore and the UK. The original Meter Eye business continues as Smart

Parking’s Technology division and remains based in Auckland.

In 2011, SPZ acquired Town & City Parking (TCP) which at the time was the UK’s largest retail parking operator

managing over 1,100 car parks across the UK. The price of £9.5m (including earn-outs) was based on a multiple

of 4.4x ‘maintainable EBITDA’. TCP had around £15m or revenue and was unprofitable based on statutory

accounts. SPZ was familiar with the business as it was the exclusive reseller of Meter Eye’s technology in the

UK. These operations now form the core of SPZ’s Parking Management division and are based in Birmingham.

Segment reporting segregates Technology, Parking Management and R&D functions as illustrated below:

Source: SPZ-ASX 2018 Annual Report

Technology operations are loss-making at the adj. EBITDA line and a similar loss from R&D, which we mostly

link to Technology operations. Parking Management operations are responsible for >100% of adj. EBITDA and

over 90% of revenue is derived from the UK.

Source: SPZ-ASX 2018 Annual Report


12 April 2019

Parking Management

Parking regulations in the UK differ from Australia. A major distinguishing difference in the UK is the legal

enforceability of parking fines issued by private parking operators. We believe the UK private parking industry

is best understood by considering the legislative environment before and after the Protections of Freedoms

Act (POFA) in October 2012.

Protections of Freedoms Act (POFA)

Pre-POFA

Prior to POFA it was generally an accepted practice for businesses to install a clamp on a vehicle parked

illegally on private land in England and Wales. All that was required was a valid license issued by the Security

Industry Authority (SIA). Motorists were forced to pay a removal fee in order to regain access to their vehicle

and failure to pay the fee could result in the vehicle being towed.

Government statistics suggested around 500,000 clampings were taking place on private land annually,

resulting in motorists paying over £55 million in charges. This works out to an average of roughly £110 charge

per incident. Wheel clampers were widely criticised with growing concerns about exploitation by rogue

operators. POFA legislation was introduced to shut down rogue operators and provide a legal framework for

motorists and private parking operators.

Post-POFA

Following the introduction of POFA it became a criminal offence to clamp on private land thereby ending the

practice. POFA also made it legal for the ‘keeper’ of the vehicle to be held liable for unpaid parking charges

incurred on private land. The keeper of the vehicle means the person by whom the vehicle was kept (owned)

at the time it was parked.

With clamping outlawed, private land owners and their agents (parking management companies) migrated

their business models to the issuance of tickets or penalty breach notices (PBN’s). PBN’s can be issued to

motorists after requesting address details from the Driver and Vehicle Licensing Agency (DVLA) vehicle register

database - an agency of the UK government. The DVLA provides motorist address details where the requesting

company is a member of an Accredited Trade Association (ATA) and they are determined to have ‘reasonable

cause’. Parking management companies are deemed to have reasonable cause where there is evidence the

motorist has parked in breach of terms and conditions of the site.

There are two ATAs in operation in the UK; The British Parking Association (BPA) and the International Parking

Committee (IPC). ATAs regulate members including dispute resolution, compliance, investigation of breaches

and disciplinary action. ATAs enforce a code of practice and all members are expected to have systems and

procedures in place to ensure compliance with the code otherwise they risk losing access to DVLA records.

Members are subject to frequent audits to ensure they remain in compliance with the code.


12 April 2019

Legal Enforceability of PBN’s at Common Law

The common law enforceability of PBN’s and the penalty size was decided in Parking Eye v Beavis, which was

appealed up to the UK Supreme Court in 2015. Beavis raised two arguments why he should not have to pay a

£85 parking fine, namely that it was (i) unenforceable at common law because it is a penalty, and (ii) unfair and

therefore unenforceable. The judge found the charging of a penalty to be ‘perfectly reasonable’ based on two

main considerations:

1. To manage the efficient use of parking space; as a deterrent to motorists from occupying parking

space for long periods or engaging in other inconsiderate parking practices, and

2. To provide an income stream to enable the parking operator to meet the costs of operating the

scheme and make a profit from its services, without which those services would not be available.

The judge in this matter considered the £85 charge as “fair [and] reasonable” citing three key considerations:

1. The fact that motorists regularly use the car park knowing of the charge is some evidence of its

reasonableness.

2. A large charge is necessary for there to be a deterrent element for ignoring the penalty and

commercial pursuit of offenders, and

3. A penalty of £100 (recommended by the British Parking Association) is comparable with penalties

charged by local authorities, which are regulated by statute.

The equivalent Scottish court case was Vehicles Control Services v Mackie [2017] where the Sheriff referenced

the judgement in Parking Eye v Beavis and similarly concluded the driver of the vehicle was in breach of

contract and liable for penalties.

We believe this is broadly underappreciated by Australian investors. Not only is the legitimacy of private

parking penalties ratified by UK common law, the size of the penalty was also assessed and deemed to be

reasonable. The main consideration for the courts and parliament alike is that private property owners must

be able to act against motorists who park without permission. Since PBN’s are not statutory fines,

enforceability against motorists who refuse to pay requires pursuit through the district courts. Litigation

results in high success rates for private parking operators, however it can be expensive to pursue this path. We

believe most business models survive off undisputed PBNs that are paid within the grace period.

Since the introduction of POFA there has been a dramatic increase in DVLA requests from parking operators

looking to issue PBN’s. The following graph is a time series of requests made by parking management

companies for DVLA data, compiled by RAC Foundation.


12 April 2019

Source: RAC Foundation

We estimate PBN’s issuance growth at roughly to 20 per cent p.a. over most of the past decade, much of this

driven by adoption of Automatic Number Plate Recognition (ANPR) technology. ANPR systems are fully

automated and operate 24/7 resulting in the capture of substantially more infringement events per site. The

reduced operating cost relative to warden-based solutions has also materially increased the number of private

car parks where parking management is now feasible.

Using conservative assumptions for payment compliance we estimate industry PBN revenue in 2017/18 of

roughly £135 million or A$250 million. This would indicate the industry has nearly tripled since 2012 with SPZ

capturing around a 10 per cent market share. The industry is again under criticism with concerns around the

re-emergence of a rogue element. The UK Government have moved to correct this through the introduction of

the Parking (Code of Practice) Bill which has passed into law in early 2019.

The Parking (Code of Practice) Bill

The Parking (Code of Practice) Bill is not designed to challenge the legality of private parking penalties. It is

concerned with establishing an industry code that is more transparent and fairer to consumers, whilst

outlining best practice guidance. Drafting the code is to occur through consultation with the industry. The new

bill will provide the regulator with stronger powers to deal with code breaches and a strengthened appeal

process for motorists. ATAs will soon no longer be responsible for regulating the industry.

Non-compliant parking operators won’t be committing a criminal offence however non-compliers will be

denied access to DVLA data necessary to issue PBN’s. The new regulator will also take responsibility for annual

audits. To fund the establishment of this new code and ongoing costs of enforcing it, the bill also provides for

the introduction of an industry levy.


12 April 2019

Key particulars of the new bill include:

1. The introduction of best practice guidelines for:

- Acceptable equipment and technology usage

- Clear and accessible displays of terms and conditions

- Mandatory transaction period and grace periods for car park entry/exit

- More onerous expectations for complaints handling (response times)

2. Appointment of a single appeals service for the entire industry (NB: currently each APA has its own appeals

handling body). The new appeals service is likely to be more sympathetic to motorists in areas where fines may

be technically enforceable but morally contestable i.e., tariff paid but registration details entered incorrectly.

3. A proposed industry levy with the following estimates for annual costs to accredited operators:

- Year 1: £100,000 per operator to cover the cost of producing the code and accreditation of parking

associations

- Subsequent years: £4,000 - £8,000 annual accreditation fee.

4. Possible costs to operators required to upgrade their equipment to adhere to the best practice guidelines in

the new code.

Our thoughts

Smaller competitors could be facing a significant increase in cost of doing business in addition to the annual

levy. For example, we expect minimum acceptable standards for complaint response times will require an

increase in staffing levels that make smaller operators uneconomic. SPZ has made a lot of these operating

adjustments in 2H18 and 1H19. We suspect some operators may look to divest/close operations rather than

pay the levy or spend capital to upgrade their existing sites to meet the new guidelines.

We speculate the new bill could accelerate consolidation as operators look to amortise higher fixed costs of

compliance (levy, appeals handling, call centre) across a larger revenue base. We also see increasing

size/market share as a key strategy for managing multi-site customers and navigating regulatory risk.

The Industry

According to the DVLA there are 38 million vehicles on the road in the UK and over 19 million journeys occur

on UK roads each day that end at a parking space. SPZ cite 45,000 off-street car parks in the UK, of which it

believes 15,000 are suitable for an ANPR solution. We estimate current market penetration of around 5,000

sites or 33% based on Smart Parking’s figures.

The industry is fragmented with the two main ATA’s each listing around 100 companies as members. In

2016/17 a total of 109 parking companies purchased data from the DVLA. Nonetheless the five largest

companies accounted for over half of data requests. Smart Parking was the second largest purchaser of data,

behind market leader Parking Eye which alone accounted for 32% of data purchases. Parking Eye has around

1,700 sites compared to around 300 for SPZ at 31 December 2018.


12 April 2019

No. of records requested Share of total records

requested

Parking Eye 1,530,259 32%

Smart Parking 329,157 7%

Euro Car Parks 306,857 7%

Highview Parking 271,917 6%

Athena ANPR 246,743 5%

Cumulative Total - Top Five 2,684,933 57% Source: https://www.racfoundation.org/data/parking-company-requests-for-dvla-data, TC Estimates

We cross-check this data against industry appeals made POPLA; an appeals body for the British Parking

Association (one of the two ATA’s). Similarly, we find activity concentrated amongst a few companies.

No. of appeals 2017/18 Share of total

appeals

Parking Eye 20,853 31%

Smart Parking 9,111 22%

Civil Enforcement 4,883 12%

UK Parking Control 3,665 9%

Ethical Parking Management 3,478 8%

Cumulative Total - Top Five 41,990 62% Source: POPLA Annual Report 2018

The POPLA appeals data shows SPZ as being subjected to a relatively much higher appeals rate compared to

peers. Additionally, their rate of uncontested appeals is also much higher than peers. In our view, this supports

a thesis that SPZ’s previous UK management were issuing speculative PBN’s.

Company economics

There are multiple possible revenue streams for parking operators and economics differ depending on

business model, unique site considerations and client bargaining. Major revenue streams include:

- Fees generated by pay machines from standard parking charges

- Revenue raised from parking penalties

- Site management fees

- Marshalling fees

The parking operator negotiates its remuneration from the above revenue streams and the site

owner/manager retains the residual. Size of compensation depends on the type of solution requested and the

resources required to manage it.

SPZ’s business model concentrates on sites where ANPR technology can be employed uniformly, eliminating

the need for on-site wardens. SPZ tend not to charge a management fee, but instead retain the revenue

collected from parking penalties with the land owner taking revenue raised by the pay machines. Typically, SPZ

will fund the provision, installation and maintenance of site infrastructure which usually consists of signage,

pay machines, cameras and other equipment. In a typical deployment establishment costs, including

hardware, are around £15,000. The payback on this investment is usually <1 year, however SPZ usually enter a


12 April 2019

multi-year contract with the site manager. The average contract length is around three years. SPZ will

sometimes agree to share penalty revenues with the site manager where the economics make sense and

where the counterparty is prepared to enter into a five-year agreement.

Three major revenue drivers include:

- Number of infringement notices issued (a function of number of sites and site productivity)

- Proportion of infringement notices successfully collected upon, less taxes any discounts for early

payment

- Share of revenue paid to site owners/managers.

Penalty revenue is generally capped at around £100 per infringement and both industry APA’s require

members to offer a minimum discount of least 40% if paid within 14 days. Accordingly, SPZ generates revenue

of around £60 per PBN collected and we estimate they collect around 50% of those issued. It is not SPZ’s

strategy to pursue unclaimed fines through district courts however they refer overdue claims to debt

collectors. The debt collector adds a collection fee on top of the penalty, usually around £65 which it keeps if

successful.

Smart Parking is charged £2.50 each time it requests keeper data from the DVLA. Since we estimate 50% of

penalties are collected, this works out to around £5.00 per penalty collected plus the cost of printing and

mailing which could add another £1.00 per penalty collected. SPZ currently has around 130 staff employed in

the UK. We estimate half of these roles are variable in nature i.e., salespeople, account managers and site

attendants. The balance of staff is in call centre, appeals and other administrative functions.

The UK subsidiary files a separate set of statutory accounts which we’ve tabulated below. These accounts

demonstrate that operations were profitable from FY16 – FY18 and admin costs absorb a significant

proportion of gross profit. Gross profit has expanded despite a relatively flat revenue performance due to a

couple of key customer losses. Customer concentration has reduced significantly since these two events. The

increase in gross profit can be linked to the growing prevalence of ANPR operated sites. In our view, gross

profit growth in this division should drive expansion of EBIT margins.

£ millions FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Revenue 14.4 14.9 12.5 11.3 11.9 14.3 13.0 14.7

COGS (8.4) (8.8) (8.6) (8.3) (7.8) (7.2) (5.9) (6.7)

Gross profit 6.0 6.2 3.9 3.0 4.1 7.0 7.1 8.0

Admin (8.0) (7.8) (4.7) (4.3) (4.6) (6.3) (5.0) (5.8)

Significant items

(0.5) (0.7) (0.1) (0.1) (0.8) (0.3)

Operating EBIT (2.0) (1.6) (1.3) (1.9) (0.6) 0.5 1.3 1.9 Source: Companies House Gov.UK, TC estimates

FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18

Gross profit margin 42% 41% 32% 27% 35% 49% 55% 54%

EBIT margin -14% -11% -10% -17% -5% 4% 10% 13% Source: Companies House Gov.UK, TC estimates


12 April 2019

Company presentation materials highlight site economics as follows:

Source: FY18 Results Presentation

The reduced figures for FY18 reflect operational changes following the removal of UK management and

represent a significant decline in profitability. Nonetheless, a seven-month payback is still an attractive

investment proposition if this new model proves to be achievable. Our understanding is the main change in

site economics reflects the adoption of a more lenient approach to site entry/exit grace periods and the

issuance of fewer speculative PBN’s following the identification of these practices in FY18. We suspect new

legislation would have forced these changes anyway. There was also an increasing client revenue share in

FY18, the incidence of which we understand has since been reduced and stricter controls employed.

Economics remained soft in 1H19 with PBN’s issued continuing to decline despite meeting a site addition

target of 12 net new sites per month. We calculate 2Q19 PBN’s per site declined to roughly 100 per month,

down from 130 in FY18. We partly attribute this to the loss of a highly profitable site due to redevelopment,

but seasonality could also be a factor. Regardless of cause, this number needs to stabilise in order to have any

confidence in the future profitability of the business model. Recent deterioration in PBN’s issued per site

combined with added compliance and sales resources have pushed out the timing for a return to profitability.

SPZ’s Revenue Mix

Prior to FY16, financial presentations broke out revenue for the parking management segment by function.

There were three major revenue streams including civil penalties (PBN’s), revenue from pay machines, and site

management fees. A history of revenue by function (until disclosures ceased) is provided below:

£ millions FY12 FY13 FY14 FY15

Management Fees 5.5 5.2 4.6 4.2

P&D Income 8.6 8.2 8.8 9.1

Civil Penalties 3.7 4.3 4.5 6.9

Marshalling 2.1 1.1 0.9 0.8

Other 1.5 0.4 1.2 0.3

Total Revenue 21.5 19.2 20.0 21.4 Source: Company Presentations, TC Estimates


12 April 2019

FY12 FY13 FY14 FY15

Management Fees 26% 27% 23% 20%

P&D Income 40% 43% 44% 43%

Civil Penalties (PBN’s) 17% 22% 22% 32%

Marshalling 10% 6% 4% 4%

Other 7% 2% 6% 2% Source: Company Presentations, TC Estimates

Civil penalties revenue started to increase in FY15 while management fees simultaneously entered decline.

This is consistent with the ANPR strategy employed by new management from November 2014. Following the

loss of a material contract with Asda and with growth in the number of ANPR operated sites, civil penalties

revenue increased to around 75% of segment revenues by FY17 based on more recent disclosures. We

estimate penalty revenues are approaching 90% of Parking Management revenues today.

Time series data for PBN issuance only goes back to FY16 when disclosures were first made. The following

graphs reflect data up to 1H19:

Source: Company Presentations, TC Estimates

PBN issuance is a function of motorist activity and parking behaviour. Q3 tends to be a seasonally weaker

quarter due to holiday timing and the peak of winter. In severe weather the confidence level of number plate

recognition declines resulting in a reduced percentage of infringements that can be reliably enforced. This was

another negative factor in FY18. Despite significant site growth in FY18 and 1H19, PBN issuance has declined

by around 10% in absolute terms year to date. On current site growth trajectory, and given adverse weather

impacts in the comparable period, we are expecting to see PBN issuance to be flat in FY19.

Modelling earnings

Parking Management operations are mostly leveraged to three key variables:

- The rate of net new site additions,

- Enforceable PBN’s issued per site, per month, and

- Admin cost control.

-

20,000

40,000

60,000

80,000

100,000

120,000

Q1 Q2 Q3 Q4

Parking Breach Notices (PBN's)

FY16 FY17 FY18 FY190

50

100

150

200

250

300

350

FY16 FY17 FY18 1H19

ANPR Sites At Period End


12 April 2019

In our view, so long as the number of sites is growing and PBN’s issued per site is stable, SPZ should see margin

and profit growth on its fixed cost base in the UK. Our estimates assume 10 net new sites added per month

and PBN’s per site stabilising at around 100 per month. Management cites an addressable market of 15,000

off-street car parks in the UK, so there is plenty of scope for site growth for the foreseeable future at current

growth rates.

Market leader Parking Eye currently operates around 3,500 sites with 350 employees. At the time of its

acquisition in July 2018, Parking Eye reported revenue of £40m and £14m of EBITDA in the year ended 31

December 2014. The acquisition price of £235m represents a trailing EBITDA multiple of nearly 17x. This is a

significant premium to where SPZ trades. In our view, a sale of UK operations, even in a sub-scale state, would

be materially accretive if anything approaching the Parking Eye EBITDA multiple can be realised.

Parking Eye’s 35% EBITDA margins are conceivable for SPZ if they can meet their targeted site economics of

65% EBITDA margins. Assuming divisional overheads of around $15m and annual revenue per site of roughly

$60,000, we estimate a site footprint of around 1,000 sites would be required to achieve this. Extrapolating

the current growth site trajectory this could be achievable in 5-6 years. These metrics also support an

argument for SPZ being an attractive acquisition target as other operators look to scale their fixed cost bases.


12 April 2019

Technology Segment

SPZ’s Technology business serves two main markets: 1) on-street car parks, typically operated by

municipalities and off-street car parks, operated by private companies and municipalities. Solutions generally

differ but they broadly involve a mixture of sensors, signage and guidance systems for reducing congestion and

navigation times. SPZ is unusual in serving both markets - competitors typically specialise in a single solution

serving a single market.

An off-street deployment might include signage, guidance systems and sensors (in-ground and/or overhead) to

direct motorists towards vacant spaces. An on-street deployment could involve in-ground sensors, wireless

infrastructure, guidance systems and mobile applications to improve navigation, identify enforcement

opportunities and facilitate payments.

Source: SPZ-AU 1H19 results presentation

Smart Parking’s technology solution comprises a few key components:

- SmartEye – in-ground sensors and overhead guidance indicators

- Smart Guide – Parking guidance system

- SmartRep – Parking data management software

In the off-street environment SmartEye sensors identify available spaces and Smart Guide helps customers

navigate with digital signage and LED lighting. In the on-street environment SmartEye sensors identify

available spaces and incidence of overstay. This information can be relayed to inspectors for enforcement. In

future applications Smart Guide can be fed into navigation applications to help motorists identify vacant on-

street spaces as they transit.


12 April 2019

There can be additional utility depending on the type of application. For example, in-ground sensors help

supermarkets identify vehicles parked beyond the maximum stay time. Data captured through the sensors is

relayed to SmartRep software is available to the site manager to help understand usage i.e., areas of

congestion and utilisation of disabled bays. Big data tools are also available for reporting and planning

purposes. SPZ already generates revenue from provision and management of this data for customers.

Parking Sensors

Sensors are at the core of Smart Parking’s offering. The company spends over $500k annually on research and

development and design, although manufacturing is outsourced. The majority of R&D occurs in New Zealand

with 35 staff based in the region. SPZ are currently on the third generation of sensor design and development

are also moving further into the software layer including cloud networking capability and the development of

payments applications. In our channel checks we found customers are increasingly focussed on

software/networking layer capabilities such as data management products and consumer facing applications.

Sensor accuracy is an important consideration in the trial phase, however most operators are capable of

meeting 90%+ accuracy standards. In the last few years SPZ has also received interest from third party

distributors looking to export their sensor technology into overseas markets. In FY18 SPZ sensors were

installed in European and North American markets as a result of these emerging relationships.

Sensor Technology

There are two main in ground sensor technologies in commercial application:

- Infrared

- Electromagnetic

Infrared sensors work by an LED emitting light and a diode capturing a ‘pulse’ of light that bounces back when

a vehicle passes above the unit. A vehicle occupying a parking space is identified for the duration of time that

light emitted from the sensor bounces back from the underside of the vehicle. When the vehicle leaves the

parking space the pulse no longer returns and the sensor communicates to the parking guidance system the

space is vacant. For enforcement purposes, the first pulse rebounded is time stamped as the moment of entry

for the vehicle and it is assumed that the same vehicle occupies a space until the pulse from the sensor no

longer rebounds. Vehicle overstay is calculated based on the duration of uninterrupted pulses since the initial

time stamp.

Sensor accuracy is a trade-off between the frequency of pulses and power efficiency. Since sensors are

designed to last for 5-10 years, a too frequent pulse rate runs the risk of draining the battery with accuracy

deteriorating as batteries approach end-of-life. Too infrequent pulsing also runs the risk of reduced accuracy

since there is risk of a vehicle leaving and being replaced by a new vehicle between pulses. Most sensors send

out a detection pulse at five to thirty second intervals.

The basic principle for electromagnetic sensors is to detect movements in the earth’s magnetic fields arising

from the presence of heavy metal objects above. This is achieved through specifically configured electronic

circuits that carry an electric current. Shifts in the magnetic field above the circuits cause changes in the flow


12 April 2019

of electric current, signalling to the parking guidance system that a vehicle has entered the space. An

advantage of magnetic sensors is their ability to sense/pulse multiple times per second.

Magnetic sensors require ferrous materials to detect changes in magnetic field, so non-ferrous metals like

aluminium are unable to be detected. External noise can also distort readings, for example nearby trams or

large trucks can influence the magnetic field above. Most new sensors feature both technologies where the

magnetic reading acts as a redundancy to the infrared signal. This improves accuracy, but again there is a

trade-off to battery life. We understand the latest generation of Smart Parking’s sensors utilise both

technologies, however earlier sensor deployments used infrared-only technology.

Sensors cannot be thought of as a stand-alone product and stand-alone tenders for sensors aren’t common

practice. The utility of the sensor comes from the full technology stack, including the parking guidance system

and other applications.

On-street Market

Parking revenue is often the second largest revenue item for cities/councils and is commonly viewed as a

strategic lever for attracting visitation. In addition to substantial investment in ticket inspectors, there is a

necessary investment in infrastructure to facilitate transactions. The two key hardware items here are hand-

held devices for inspectors and payment machines alongside parking spaces. More recently cities/councils are

investing in solutions to capture real time data to measure and manage traffic flow. The key enabling

hardware here is either in-ground sensors and/or cameras enabling number plate recognition. This needs to

be supported by networking infrastructure and applications for communication and data management.

Installation of parking infrastructure is expensive with sensor installation costing between $100-500 per bay,

around $8,000 for a payment machine and around $1,500 per month for handheld enforcement devices.

Actual pricing is variable and usually depends on the type of solution and number of units required. For larger

cities it is common for a project costs running into the millions of dollars. Cities/councils usually tender these

projects every five to ten years, with the hardware expected to have a useful life in line with contract term.

Equipment requirements differ depending on the solution selected which often depends on the objectives of

the city/council. For example, some ticket/payment machines are designed as pay-to-plate, whereby the

motorist enters their number plate into the machine and ANPR technology tracks the duration of stay to cross

reference against the pay machine input. For solutions deploying pay-to-plate machines there is no

requirement for in ground sensors and a reduced requirement for inspectors. Sensors are required where

there is a desire to capture real-time parking data but carry a trade-off because they require human inspectors

to issue enforcement notices.

The on-street market is characterised by one or two dominant players for each hardware component. For

example, the payment machine market in Australia is dominated by Duncan Solutions and APARC, the market

for hand-held devices is dominated by DCA and ADR Riley and the two market leaders in the sensors are DCA

and Smart Parking. The nature of the competition is high given the length of contract and the recurring nature

to revenues. Site retention is crucial because a lost customer results in being locked out for the duration of the

contract.


12 April 2019

Sales cycles can be long. Even after a tender is awarded there can be prolonged negotiations over contractual

details. It’s not uncommon for a six-month time lag between successful tender and revenue go-live. Since no

single company offers the fully horizontal tech stack, operators tend to partner in responding to tenders.

Based on our market enquiries this is starting to change and there is a push towards sector consolidation. In

our view, single-product providers are increasingly at a competitive disadvantage to competitors who can

integrate across multiple offerings. Incumbency is also an advantage, particularly where contracts are

staggered, since any new vendor needs to be able to integrate into existing infrastructure.

Off-street Market

The off-street market is dominated by two large operators in Australia - Wilson Group and Secure Parking.

Industry data is hard to come by but disclosures at the time of Secure’s acquisition in December 2016 suggest

it had a market share of around 38%. Based on 318,000 parking bays at the time, this puts the Australian

market at just over 800,000 off-street parking bays.

Smart Parking has been selected as the preferred tenderer for Wilson Parking in New Zealand and has more

recently started to secure work from Wilson Australia. The arrangement includes integration of Smart

Parking’s applications into Wilson’s technology. Smart Parking has also deployed it’s offering at a number of

Coles supermarket car parks. In principle, these two customers are each capable of supporting hundreds of

sites with this technology and similar opportunities exist in the region with similar companies where parking is

fundamental to the retail experience. Competition in this space is fragmented and there are a number of

similar-sized operators like Frog Parking, TMA and Park Agility.

Estimating market size

We estimate Smart Parking currently has around 60,000 sensors installed worldwide although this includes

non-commercialised pilots. A large on-street deployment could involve anywhere from 2,000 to 5,000 parking

spaces, each needing a sensor. We estimate there are 120,000 on street parking bays in sizeable cities/council

areas across Australia and New Zealand where parking requires payment. This is based on a market size of

around 10,000 pay machines each serving 10 parking bays. Assuming a seven-year replacement cycle, this

equates to around 17,000 sensors per annum addressable market.

We estimate the addressable market in Australia and New Zealand for off-street parking is around one million

sensors. However, penetration into this sector is low and progressing slowly. For example, we estimate

Wilson’s Parking New Zealand is adding around 1,000 -1,500 sensors per year. Given they are the largest

parking operator in New Zealand with nearly 300 sites, the current run rate of around 10 sites per year works

out to a replacement cycle of 30 years. Assuming a technology solution is viable across all sites, a replacement

cycle of 10 years would see annual demand for around 3,500 sensors in NZ alone.

In the past two financial years Smart Parking has received orders exceeding 20,000 sensors including

significant projects in Hobart (TAS), Hamilton (NZ), Cardiff (Wales), Adelaide (SA) and Mooney Valley (VIC).

With many of the major cities in the process of deploying or having already deployed, there’s an argument

most of the large opportunities have been harvested. To this end, we are aware of some large tenders under


12 April 2019

trial for FY19 and we highlight SPZ’s success in extending their model in payment applications in a recent

tender.

In our view, the economics offered by payment processing are attractive since it is ancillary to the sensor

business and transactional revenue scales independent of major additional fixed costs. We see a substantial

opportunity to displace transactions currently processed by physical machines over time. Of the traditional

revenue streams, we think payments is the most vulnerable to competition. Nonetheless we expect physical

infrastructure and handheld devices will be required for the foreseeable future. Sensor technologies require

human verification to be enforced (they can only determine whether a bay is occupied or not) and application

downloads will take many years to replace credit cards (and cash) as the default payment medium.

SPZ disagree with concerns around market saturation citing their growing presence in the off-street market

and significant potential to expand into the UK. In our discussions with councils we’ve identified metered

parking as a first-move opportunity based on the importance of parking as a revenue stream and the

measurable payback on investment. Potentially, if congestion reduction and navigation assistance targets are

met, we see scope for sensor applications to broaden into unmetered parking spaces and other adjacent

opportunities such as permit parking and loading zone management.

Segment Financials

The technology business has two main external drivers:

1) Recurring revenue, usually in the form of hosting fees, maintenance fees and more recently a margin

on payment transactions processed, and

2) Project installation revenue usually installed on a cost-plus basis.

Revenue is also generated by the sale of products and licensing of systems to the UK Parking Management

subsidiary. This accounts for the inter-segment sales in financial reports. As a rule of thumb, installation

revenue is around $250/300 per sensor with gross profit margins of roughly 40%. Recurring revenue is $1-

2/month for hosting/data and $3-4/month for maintenance.

Net revenue in the technology segment has grown from $1.2m in FY13 to $6.8m in FY18, however adjusted

EBITDA has consistently maintained in the $1-2m loss range annually after including spend on research and

development. SPZ don’t capitalise any of their research and development spend.

Gross revenue 5.6 5.2 5.9

Recurring revenue 1.2 2.1 2.6

Inter-segment -2.2 -1.4 -2.0

Installation/other revenue 2.2 1.7 1.3

Net revenue 3.4 3.8 3.9

Recurring revenue % gross 21% 40% 44%

Recurring revenue % net 35% 55% 67% Source: SPZ-AU company materials, TC estimates


12 April 2019

We estimate 20,000 sensor installs annually is a break even result. We think this is unlikely to be achieved in

the Australian and New Zealand markets alone and further international success will be required. The United

Kingdom represents a lucrative opportunity given the market size but technology adoption has been slower

than in Australia. SPZ has participated in several tenders in the UK and has secured commercial deployments in

Cardiff and Westminster. Recently they’ve also achieved an approved ‘Car Park Management and

Infrastructure’ supplier to the UK National Health Service (NHS). This could be a significant step in gaining

traction in the UK. We note that parking management revenues for the NHS were £174m in 2017 (source

BBC.com) with less than £1m of that coming from penalties.

SPZ installed around 4,000 sensors in 1H19. Our estimates extrapolate this run rate of around 8,000 sensors

annually. Should any material business wins occur offshore we think this number will prove conservative and

timeline towards profitability could be materially reduced. We are expecting the Technology division to

continue to produce modest annual losses over our forecast period. Nonetheless, this market has potential to

be significant with commercial acceptance of these technologies and there is a strong logic for sector

consolidation. In our view it makes sense for SPZ to engage in M&A to expand their offering and address the

trend towards growing product integration. Alternatively, we think an acquirer may see this division as a

complementary bolt-on. Once the UK Parking division has stabilised, we’d expect management will look to

deploy surplus cash to bulk up this division.


12 April 2019

Balance Sheet and Capital Management

Smart Parking possesses a strong balance sheet for a company of its size, mostly courtesy of equity raised in

FY17. The cash was originally earmarked for acquisitions although operating challenges in FY18 have distracted

away from this endeavour. At last balance date there is no material borrowings and cash and cash equivalents

exceeded $13m (around half of this was invested in bonds at 30 June and these have since been sold). Net

cash accounts for around 40% of SPZ’s market capitalisation.

With changed operating economics in FY19, including around $3 - 4m in annul capex for parking equipment

herein, we still expect the business to generate free cash flow albeit modest amounts initially. Cash assets are

almost entirely surplus to operating requirements and could potentially be returned to shareholders through

capital management if suitable acquisitions cannot be found. Alternatively, if an accretive target can be

identified there is potential to materially increase earnings through M&A. Since the business is arguably sub-

scale, we think management prefers the latter.

Smart Parking mostly utilises third party manufactured hardware. Where it manufactures sensors, inputs are

cheap and there is no requirement for expensive plant/machinery. Net working capital is negligible and

inventory holdings run at around 90 days of gross sales in the Technology division. Beyond this there are no

material accruals or off-balance-sheet liabilities. The main capital requirement in the business is for new sites

added in the UK Parking Management division which are targeting seven-month payback periods. On this

basis, growth should be cash generative, especially if the Technology business achieves profitability. SPZ has

not paid a dividend since listing, nor does it have distributable franking credits, however based on our

estimates it could consider a dividend as early as FY21.

The loss of a couple of major customers in the FY16-FY17 period shielded the business from substantial capital

expenditures, since infrastructure employed on these sites was able to be redeployed across new sites. This

surplus infrastructure has now been mostly deployed which will result in a rise in capital expenditures in FY19

and thereafter. Based on a cost of around £15,000 (roughly $30,000) per new site install and modelling for 13

net new sites per month, we forecast annual capex in the range of $3.5-4.0m per annum. This is likely to

absorb most free cash flow until 2020, when operations reach critical mass scale.


12 April 2019

Valuation & Recommendation

In our view, SPZ mid-turnaround is difficult to value as a going concern. Uncertainty around profitability post-

turnaround reduces the level of confidence in our forecasts. We try to compensate for this by adopting

conservative inputs and applying modest earnings multiples. Our preferred methodology for valuation

separates the two operating divisions on a sum-of-the-parts basis. We arrive at our valuation based on FY21

estimates at which point we anticipate the turnaround to be completed. We try to compensate for duration

risk by applying a modest earnings multiplier. We also allocate corporate overhead costs to Parking

Management operations to reflect additional costs borne as a stand-alone entity.

For Parking Management operations, we believe EBITDA multiple is the most appropriate valuation metric

based on relatively low maintenance capex requirements and EBITDA’s prominence in recent sector M&A

activity. Strong bidder interest in the recent sale of Parking Eye and the transaction multiple of around 17x

EBITDA demonstrates the appeal once scale economics are achieved. We think the high price signals the asset

is being viewed as a platform and further consolidation of the industry is probable. If SPZ can meet budgeted

economics and sustain site growth rates, we think a FY21e EBITDA of roughly $10m is achievable for this

operation. We deduct corporate overhead from this figure and apply a relatively conservative 8x EBITDA

multiple to arrive at our intrinsic value estimate of $70m or 19.4 cents per share. We think M&A potential

partly mitigates turnaround risk, since an acquirer should be able to extract significant cost-side synergies.

We find Technology operations difficult to value based on our view that operations will remain loss making

over the forecast period. We think the latent value in this business is the installed base generating recurring

revenues and the potential for an adjacent player to bolt-on SPZ’s sensors and IT stack to their established

products. Applying a modest revenue multiple of 2-3x FY21e revenue produces and intrinsic value estimate of

around $8 – $12m. This is around half the valuation of the company when it was acquired in FY11.

Division Multiplier Type Intrinsic Value ($m) Per share

Parking Management 8.0 FY21e EBITDA less corporate costs 70 $ 0.19

Technology 2.5 FY21e Revenue 10 $ 0.03

Surplus cash 1.0 TC estimate 10 $ 0.03

90 $ 0.25

Our sum-of-the-parts analysis generates an intrinsic value estimate of $0.25 per share. This compares to the

current share price of $0.125. Parking management and surplus cash assets comprise roughly 90% of this

intrinsic value. Should our estimates prove broadly accurate, we think SPZ shares offer the potential for

attractive returns. Nonetheless, our estimates assume a successful business turnaround. While we have tried

to accommodate the added risk through conservative inputs and earnings multiples, we acknowledge SPZ

remains a largely speculative investment until profitability and earnings growth are restored. We initiate

coverage with a Speculative Buy recommendation.


12 April 2019

Risks

Changing regulation – SPZ’s business model is affected by regulatory conditions including dictating the

amount of revenue permissible per ticket issued. The passage of new laws in the United Kingdom has the

potential to impact profitability, however we expect only a modest impact based on the current proposals.

Parking fines are an emotive issue for motorists and there is continuing risk that further political intervention

could adversely impact the practices or profitability of parking management companies.

Geographic detachment – SPZ has offices in Australia, New Zealand and the UK, with head office located in

Australia. Oversight of global operations is a challenge as evidenced by issues in UK operations in FY18. The

management of multinational presence will continue to present control risks, the mitigation of which may

require incurrence of additional costs.

Brexit and other macroeconomic risks – Operations in the United Kingdom comprise most of normalised

group profits. While the issuance of parking tickets is a relatively defensive business model linked to motorist

activity, economic events could impact general activity levels or collection rates. Second order impacts to the

exchange rates could also adversely affect SPZ’s profits since profits and assets are translated from Pounds.

These risks appear to be elevated at present due to the approaching Brexit deadline.

Technological failure – Sensor technologies are continually developing and their application in a commercial

setting is only limited. There is a risk that existing sensor installations or new version releases may not perform

to the required standard for contract duration. This could require remedial spend by SPZ and/or could impact

the demand for that product in new deployments.

Reputational Damage – Parking fines are an emotive issue and criticism of parking operators is frequent in

local media publications. There is a risk that reputational damage from sustained adverse media coverage

could result in site losses or adversely affect SPZ’s ability to grow its new site footprint.

Site maturity/Improving motorist behaviour – Following the introduction of ANPR technology to a site there is

typically a spike in penalty issuance since the technology is more effective at tracking breaches. Following the

initial spike in issuance, there is a natural deterioration in the volume of PBN’s issued as motorists

VAT refund risk – SPZ is currently consulting with UK authorities regarding the appropriate treatment of

parking management expenses for the purposes of VAT refunds. SPZ has taken a provision estimating the

potential amount owed under an adverse finding. Under a less favourable outcome the liability for SPZ could

be larger than the size of the provision. This matter is ongoing and SPZ are optimistic that they are provisioned

appropriately based on discussions with authorities.


12 April 2019

Disclosures

The following Warning, Disclaimer and Disclosure relate to all material presented in this document and should be read before making any

investment decision.

Disclaimer: Warning (General Advice Only): Past performance is not a reliable indicator of future performance. This report is a private communication to clients and intending clients and is not intended for public circulation or publication or for the use of any third party, without the approval of Taylor Collison Limited ABN 53 008 172 450 ("Taylor Collison"), an Australian Financial Services Licensee and Participant of the ASX Group. TC Corporate Pty Ltd ABN 31 075 963 352 (“TC Corporate”) is a wholly owned subsidiary of Taylor Collison Limited. While the report is based on information from sources that Taylor Collison considers reliable, its accuracy and completeness cannot be guaranteed. This report does not take into account specific investment needs or other considerations, which may be pertinent to individual investors, and for this reason clients should contact Taylor Collison to discuss their individual needs before acting on this report. Those acting upon such information and recommendations without contacting one of our advisors do so entirely at their own risk. This report may contain “forward-looking statements". The words "expect", "should", "could", "may", "predict", "plan" and other similar expressions are intended to identify forward-looking statements. Indications of and guidance on, future earnings and financial position and performance are also forward looking statements. Forward-looking statements, opinions and estimates provided in this report are based on assumptions and contingencies which are subject to change without notice, as are statements about market and industry trends, which are based on interpretations of current market conditions. Any opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice and Taylor Collison assumes no obligation to update this document after it has been issued. Except for any liability which by law cannot be excluded, Taylor Collison, its directors, employees and agents disclaim all liability (whether in negligence or otherwise) for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by the recipient or any other person directly or indirectly through relying upon the information. Disclosure: Analyst remuneration is not linked to the rating outcome in this research document. Taylor Collison may solicit business from any company mentioned in this report. For the securities discussed in this report, Taylor Collison may make a market and may sell or buy on a principal basis. Taylor Collison, or any individuals preparing this report, may at any time have a position in any securities or options of any of the issuers in this report and holdings may change during the life of this document. Taylor Collison, its officers and employees may have conflicting roles in the financial products referred to in this research and, as such, may effect transactions which are not consistent with the recommendations (if any) in this research. Taylor Collison may receive fees, brokerage or commissions for acting in those capacities and the reader should assume that this is the case. Accordingly, Taylor Collison’s employees or officers may provide oral or written opinions to its clients which are contrary to the opinions expressed in this research. The preparation of this report was funded by ASX in accordance with the ASX Equity Research Scheme. This report was prepared by Taylor Collison and not by ASX. ASX does not provide financial product advice. The views expressed in this report do not necessarily reflect the views of ASX. No responsibility or liability is accepted by ASX in relation to this report. Analyst Interests: The Analyst is a current holder of SPZ, but Taylor Collison Limited considers such holdings not to be sufficiently material to comprise the ratings or advice. The Analyst’s holdings may change during the life of this document. Other Staff (including Principal accounts) also hold SPZ: ASX securities in personal and family related accounts. Analyst Certification: The Analyst certifies that the views expressed in this document accurately reflect their personal, professional opinion about the financial product to which this document refers. Date Prepared: April 2019 Analyst: Adam Dellaverde Release Authorised by: Mark Pittman

smart parking limited (spz-au) 12 april 2019 · smart parking limited (spz-au) 12 april 2019...

Documents