KARO: The Growth Story Is Intact, the Discount Is Not
Summary
I am downgrading KARO from BUY to HOLD. It's execution is better, but I believe that the former valuation discount has largely disappeared and Q1 cash conversion needs watching.
Q1 FY2027 revenue rose 22% to ZAR1.564Bn, ARR grew 19% to ZAR5.432Bn, and net additions reached a record 142,472. Adjusted EPS increased 11% to ZAR9.53.
The demand and distribution thesis strengthened, especially in South Africa. But the ARPU thesis weakened because Tag carries lower ARPU and the Southeast Asian mix is shifting toward lower ARPU countries.
My base case values KARO at $64.50 using FY2028 EPS of ZAR46.41, a ZAR16.25/USD assumption, a 26x P/E, and a 10% discount rate. That is 1.5% below the latest price before dividends.
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