This ASX tech company’s shares could be among those to watch over the next few years

Despite a topsy-turvy start to life on the ASX, New Zealand-based tech company Eroad Ltd (ASX:ERD) is positioning itself for future growth.

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Little-known New Zealand-based tech company Eroad Ltd (ASX:ERD) has had an interesting first few months on the ASX. The company’s shares only began trading on the ASX in September. At the time, the Eroad share price was trading around $4 before it surged as high as $5.19. However, by January it has fallen off again. They have now shed almost 15% of their value. Currently, they are trading back at $4.40, giving the company a modest market cap of $360 million.

Company Background

The company develops tracking technology for the freight and logistics industries. Eroad’s telematics systems help companies oversee and manage their vehicle fleets. In addition, the systems also provide individual drivers with feedback and coaching to improve safety and performance. Eroad’s technology can even help companies manage their fringe benefit tax and fuel tax credit obligations.

Eroad’s Financial Performance

In the company’s most recent financial results for the six months ending 30 September 2020 it reported a 19% jump in revenues versus the prior comparative period (to NZ$45.8 million). Earnings before interest, tax, depreciation and amortisation expenses (EBITDA) increased 29% to NZ$15.3 million, but was flat against the prior half due to accelerating investment in research and development.

The company was impacted by COVID-19 lockdowns during the period, with sluggish growth across both Australia and North America. However, in Eroad’s home market of New Zealand, the effects from coronavirus were less severe. New Zealand revenues jumped by 13% half-on-half to $27.4 million.

Recent News

Eroad recently released an operational update for the December quarter. In it, the company reported that it had sold an additional 1,284 contracted units during the period. This reflects growth in New Zealand and Australia. Total Australian units increased by 10% quarter-on-quarter, outpacing growth in New Zealand (albeit off a much smaller base) with most sales made to small to medium-sized businesses. Eroad has stated that it is now targeting larger enterprises in Australia. In addition, the company hopes to land at least one major contract in the fourth quarter.

However, there continue to be significant headwinds in the North American market, with contracted unit numbers there declining slightly during the quarter.

Outlook for Eroad

Despite continuing challenging conditions in North America, Eroad anticipates a slight increase in revenues for the second half. EBITDA should come in roughly equal to the first half, reflecting the company’s continued investment in product development and marketing.

Eroad does forecast a strengthening growth runway over the next few years. It believes the rate of revenue growth will start to increase during FY22, but continued R&D investment (at a rate of around 24% to 27% of FY22 revenues) should accelerate growth even faster in FY23 and FY24. That could mean Eroad will be an ASX tech company to watch over the next few years.

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Motley Fool contributor Rhys Brock has no position in any of the stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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