Technology: Applied TechnologiesPointer Telocation Ltd ......place to handle significantly higher...

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William Gibson, CFA, (415) 306-5115 [email protected] Sales (800) 933-6830, Trading (800) 933-6820 COMPANY NOTE | EQUITY RESEARCH | July 7, 2017 Technology: Applied Technologies Pointer Telocation Ltd. | PNTR - $11.50 - NASDAQ | Buy Initiation of Coverage Stock Data 52-Week Low - High $5.40 - $12.80 Shares Out. (mil) 7.94 Mkt. Cap.(mil) $91.4 3-Mo. Avg. Vol. 25,999 12-Mo.Price Target $16.00 Cash (mil) $5.8 Tot. Debt (mil) $13.8 EPS $ Yr Dec —2016— —2017E— —2018E— Curr Curr 1Q 0.14A 0.19A 0.18E 2Q 0.11A 0.17E 0.18E 3Q 0.09A 0.15E 0.21E 4Q 0.06A 0.16E 0.23E YEAR 0.42A 0.70E 0.80E P/E 27.4x 16.4x 14.4x Revenue ($ millions) Yr Dec —2016— —2017E— —2018E— Curr Curr 1Q 14.8A 19.0A 19.9E 2Q 16.2A 18.4E 19.6E 3Q 15.9A 18.1E 19.8E 4Q 17.4A 19.0E 20.7E YEAR 64.4A 74.6E 80.0E 16.00 14.00 12.00 10.00 8.00 6.00 4.00 Aug-16 Sep-16 Oct-16 Nov-16 Dec-16 Jan-17 Feb-17 Mar-17 Apr-17 May-17 Jun-17 Jul-17 0.5 0.4 0.3 0.2 0.1 0.0 Price Vol (m) PNTR One-Year Price and Volume History PNTR: Initiating Coverage with a Buy We are initiating coverage of Pointer Telocation with a Buy rating and $16 price target. Pointer provides telematics products and services with operations in Israel, Brazil, Argentina, Mexico and South Africa. After a 2016 spinoff of a low-margin roadside assistance business, revenue was nearly $64.4 million last year, with Israel and Latin America accounting for 46% and 31% of the total respectively. In our opinion, the business model is one of steady growth, large enough to be consistently profitable with recurring revenue from mobile resource management (MRM) service accounting for 65% of revenue on a ttm basis. Pointer's product business, Cellocator, has about 2.5 million hardware and software installations in 80 countries. This technology provides a full range of route and task tracking capabilities as well as diagnostics and real-time alerts for driver behavior, accident and emergency support, police and first responder notification and anti-theft measures including jamming detection and fraud detection. MRM service operates a SaaS (software as a service) business model; it's a scale business with about 231,000 subscribers at 1Q17, up nearly 25% year- over-year. Hosted by Microsoft's Azure Cloud Solutions, the infrastructure is in place to handle significantly higher sales. Driven by both organic growth and tuck-in acquisitions, we expect growth to continue, producing incrementally higher operating margins as MRM service revenue grows. We estimate operating income is 10% of revenue in 2017 versus 9.7% in 2016 and 6.0% in 2015 before the Shagrir spinout. The 1Q17 operating income margin was 11.9%. Cellocator customers often provide a good filter for potential acquisitions. Acquisitions and the resulting synergies tend to work best with complementary businesses within or near existing operations and that is the company's focus. Pointer typically pays 1x-1.5x revenue or 5x EBITDA after cost synergies. Although we expect Pointer to close another acquisition this year, with more to follow in 2018, potential acquisitions are not built into our estimates. We estimate the company earns $5.6 million or $0.70 per share in 2017 on 16% revenue growth to $74.6 million. Our 2018 model estimates 14% earnings growth to $6.5 million or $0.80 per share based on 7% revenue growth to $80 million. Given its growth profile, large percentage of subscription revenue and expanding margins, our 12-month price target is $16 based on a multiple of 20x our 2018 earnings estimate, which also equates to 1.6x our revenue estimate for 2018. Important Disclosures & Regulation AC Certification(s) are located on page 12 to 13 of this report. Roth Capital Partners, LLC | 888 San Clemente Drive | Newport Beach CA 92660 | 949 720 5700 | Member FINRA/SIPC

Transcript of Technology: Applied TechnologiesPointer Telocation Ltd ......place to handle significantly higher...

Page 1: Technology: Applied TechnologiesPointer Telocation Ltd ......place to handle significantly higher sales. Driven by both organic growth and tuck-in acquisitions, we expect growth to

William Gibson, CFA, (415) [email protected]

Sales (800) 933-6830, Trading (800) 933-6820

COMPANY NOTE | EQUITY RESEARCH | July 7, 2017

Technology: Applied Technologies

Pointer Telocation Ltd. | PNTR - $11.50 - NASDAQ | Buy

Initiation of Coverage

Stock Data

52-Week Low - High $5.40 - $12.80Shares Out. (mil) 7.94Mkt. Cap.(mil) $91.43-Mo. Avg. Vol. 25,99912-Mo.Price Target $16.00Cash (mil) $5.8Tot. Debt (mil) $13.8

EPS $

Yr Dec —2016— —2017E— —2018E—Curr Curr

1Q 0.14A 0.19A 0.18E2Q 0.11A 0.17E 0.18E3Q 0.09A 0.15E 0.21E4Q 0.06A 0.16E 0.23E

YEAR 0.42A 0.70E 0.80EP/E 27.4x 16.4x 14.4x

Revenue ($ millions)

Yr Dec —2016— —2017E— —2018E—Curr Curr

1Q 14.8A 19.0A 19.9E2Q 16.2A 18.4E 19.6E3Q 15.9A 18.1E 19.8E4Q 17.4A 19.0E 20.7E

YEAR 64.4A 74.6E 80.0E

16.0014.0012.0010.008.006.004.00

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PNTR: Initiating Coverage with a BuyWe are initiating coverage of Pointer Telocation with a Buy rating and $16 pricetarget. Pointer provides telematics products and services with operations inIsrael, Brazil, Argentina, Mexico and South Africa. After a 2016 spinoff of alow-margin roadside assistance business, revenue was nearly $64.4 millionlast year, with Israel and Latin America accounting for 46% and 31% of thetotal respectively.

In our opinion, the business model is one of steady growth, large enoughto be consistently profitable with recurring revenue from mobile resourcemanagement (MRM) service accounting for 65% of revenue on a ttm basis.

Pointer's product business, Cellocator, has about 2.5 million hardware andsoftware installations in 80 countries. This technology provides a full rangeof route and task tracking capabilities as well as diagnostics and real-timealerts for driver behavior, accident and emergency support, police and firstresponder notification and anti-theft measures including jamming detectionand fraud detection.

MRM service operates a SaaS (software as a service) business model; it's ascale business with about 231,000 subscribers at 1Q17, up nearly 25% year-over-year. Hosted by Microsoft's Azure Cloud Solutions, the infrastructure is inplace to handle significantly higher sales.

Driven by both organic growth and tuck-in acquisitions, we expect growth tocontinue, producing incrementally higher operating margins as MRM servicerevenue grows. We estimate operating income is 10% of revenue in 2017versus 9.7% in 2016 and 6.0% in 2015 before the Shagrir spinout. The 1Q17operating income margin was 11.9%.

Cellocator customers often provide a good filter for potential acquisitions.Acquisitions and the resulting synergies tend to work best with complementarybusinesses within or near existing operations and that is the company's focus.Pointer typically pays 1x-1.5x revenue or 5x EBITDA after cost synergies.

Although we expect Pointer to close another acquisition this year, with moreto follow in 2018, potential acquisitions are not built into our estimates. Weestimate the company earns $5.6 million or $0.70 per share in 2017 on 16%revenue growth to $74.6 million. Our 2018 model estimates 14% earningsgrowth to $6.5 million or $0.80 per share based on 7% revenue growth to $80million. Given its growth profile, large percentage of subscription revenue andexpanding margins, our 12-month price target is $16 based on a multiple of 20xour 2018 earnings estimate, which also equates to 1.6x our revenue estimatefor 2018.

Important Disclosures & Regulation AC Certification(s) are located on page 12 to 13 of this report.Roth Capital Partners, LLC | 888 San Clemente Drive | Newport Beach CA 92660 | 949 720 5700 | Member FINRA/SIPC

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POINTER TELOCATION LTD. Company Note - July 7, 2017

TELEMATICS TECHNOLGY AND A GROWING MRM SERVICE BUSINESS

Pointer Telocation provides telematics products and services with operations in Israel, Brazil, Argentina,

Mexico and South Africa as well as an emerging business in New York City taxicabs. Israel and Latin America

accounted for 46% and 31% of 2016 revenue respectively. It is headquartered in Rosh Ha’ayin, Israel.

The Cellocator segment designs, develops and manufactures telematics hardware and software products used

to manage fleets, track assets and recover stolen vehicles. It sells to mobile resource management (MRM)

operating and service companies worldwide. Pointer’s MRM service segment bundles Cellocator products with

services to track vehicles, monitor containers and manage driver behavior.

After a July 2016 spinoff of a low-margin roadside assistance business with about $40 million in revenue,

Pointer revenue was nearly $64.6 million last year, MRM service contributing about 65% and Cellocator 35% of

the total.

MRM service operates a SaaS (software as a service) recurring revenue business model. It’s a scale business

that had about 231,000 active subscribers at 1Q17, up 9,000 subscribers sequentially and 46,000 year-over-

year. The infrastructure, hosted with Microsoft’s Azure Cloud Solutions, in place to handle significantly higher

sales levels (perhaps double) before further optimization is needed. Driven by both organic growth and tuck in

acquisitions, we expect the trend to continue, producing incrementally higher margins given the scalable

platform.

Pointer Telocation Capabilities

Source: Company Presentation, March 2017

FEMSA, the world’s largest Coca-Cola bottler, was added as a new customer in Mexico last year and the

rollout should be completed in July. FEMSA chose Pointer for its driver safety tools and applications to lower

fuel costs, internal costs and improve its distribution process. FEMSA also distributes Coca-Cola throughout

Latin America and the Philippines.

When Pointer acquires a business, it typically pays 1x-1½x revenue or about 5x EBITDA after synergies.

Acquisitions and the resulting synergies tend to work best with complementary businesses within or near

existing operations and that is the company’s focus.

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POINTER TELOCATION LTD. Company Note - July 7, 2017

Combining technologies is a challenging process when a business is acquired and the company cautiously

guides customers through changes in the software’s look and feel. Other than look or feel, the real issue is to

close any gaps in functionality between software features.

We estimate the company earns $5.6 million or $0.70 per share in 2017 on revenue growth of 16% to $74.6

million. Our 2018 model estimates 14% earnings growth to $6.5 million or $0.80 per share with 7% revenue

growth to $80 million. Although we expect Pointer to close another acquisition this year with more to follow in

2018, additional acquisitions are not built into our estimates.

Given its growth profile, large percentage of subscription revenue and expanding margins, our 12-month price

target is $16 based on a multiple of 20x our 2018 earnings estimate, which also equates to 1.6x our revenue

estimate for 2018.

Selected Meaningful Pointer Customers

Source: Company Presentation, March 2017

CELLOCATOR PRODUCTS

Fleet management products help customers reduce operational and maintenance costs, including right sizing

fleets and fleet utilization. Capabilities include remote monitoring, remote sensing and communications for both

mobile assets and assets without a constant power supply. Once installed, remote monitoring and control

solutions provide behavior and vehicle diagnostics through web-based or OS-based monitoring and

management location applications, helping fleet owners resolve critical issues in advance of serious trouble.

Communications utilize radio frequency (RF) and cellular communications technologies ranging from GSM

through LTE to transmit summaries back to fleet managers. Older cellular networks account for most of the

connections for cost reasons. This same technology is also included as part of the company’s stolen remote

recovery (SVR) line. The SVR line incudes frequency hopping spread spectrum technology in the ISM

frequency band for self-deployed wide area networks (WAN) or cellular/GPS technology communications

systems.

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POINTER TELOCATION LTD. Company Note - July 7, 2017

Pointer technology provides route and task tracking capabilities, diagnostics, real-time alerts for driver behavior

as well as a full range of anti-theft measures, including jamming detection, police and first responder

notification, accident and emergency support and fraud detection. These capabilities are key differentiators

versus competitors in Israel and Latin America.

Pointer also developed new technology for Internet-of-Things (IoT) applications, potentially opening up new

markets for connected cars, goods in transit including avionics (to help curtail the high failure rate for

technology spare parts shipments) as well as niche uses such as monitoring coolers in gas stations. Pointer

IoT technology uses six different sensors such as temperature, movement, moisture and magnetics.

Pointer driver assistance programming is combined with Mobileye vision technology for American Transit

Insurance Company (ATIC) to track and rank driver behavior on about 4,500 New York City taxicabs in return

for lower insurance costs due to a reduction in accidents. Discussions are underway with other fleets in

Manhattan as well as other locations.

FROM ITS FOUNDING IN 1991

The company was founded in July 1991 as Nexus Telecommunications Systems, a RF location business with

customers in Israel and Argentina. The name was changed to Nexus Telocation Systems in December 1997

and to Pointer Telocation in January 2000.

Pointer purchased an interest in an Argentina-based service company in 2001 but remained primarily focused

on stolen vehicle recovery and software for command and control centers until 2003 when it decided to offer a

range of additional services to automobile owners and insurance companies, a strategy it has pursued through

acquisitions in Israel and Argentina. In September 2007, Pointer purchased the assets and activities of a

private Israeli company providing cellular location-based services and technology (Cellocator) for about $18

million, adding a worldwide base of customers.

David Mahlab (60) was brought aboard as President and Chief Executive Officer (CEO) in February 2011. Mr.

Mahlab co-founded Scopus Video Networks and served as its CEO from 1995 until January 2007 and its

chairman from January 2007 until March 2009. Scopus was an Israeli-based, publicly traded NASDAQ

company that developed multichannel digital video broadcasting products. It was sold to Harmonic (HLIT - NC)

in March 2009 for $51 million, net of cash. From 2009 until joining Pointer, Mr. Mahlab was an independent

business developer. Before Scopus, he developed pilot ejection technology for the Israel military that is now

standard with NATO.

About 90% of Pointer’s business was consumer driven when Mr. Mahlab joined. Today, it is mostly business-

to-business (B2B), a change that allows for premium pricing for added features. The monthly recurring revenue

is over $17.50 a month per subscriber over the past 12 months or $44.6 million in recurring revenue.

Pointer acquired its South Africa operation just over 2½ years ago. The company spun out its roadside

assistance business (Shagrir Vehicle Services) to shareholders in June 2016. Shagrir accounted for about $40

million in revenue but it was a low-margin business with modest profits. It accounted for about 16% of the

company’s net assets and the dividend in kind to shareholders was valued at nearly $12.2 million.

Most recently, Pointer acquired Cielo Telecom in Brazil for $6.5 million in August 2016, priced to be accretive.

Cielo added about 16,000 subscribers and expanded the company’s presence in the southern part of Brazil

and the shift to Pointer’s SaaS model is underway. It is being integrated and is helping expand subscriber

growth.

KEY EXECUTIVES

Yaniv Dorani (40) became Chief Financial Officer (CFO) in April 2017, replacing Zvi Fried who decided to leave

for personal reasons after serving as CFO since 2007. Mr. Dorani has been with the company since 2008

beginning as the finance manager for the Cellocator division before serving as the VP Finance for Cellocator

and Pointer Israel since 2014. Before Pointer, he was the corporate controller for Medis Technologies and

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POINTER TELOCATION LTD. Company Note - July 7, 2017

assistant controller at Delta Galil Industries before that. Mr. Dorani was previously a senior auditor for KPMG in

Israel.

David Markus is the Chief Technology Officer. Mr. Markus joined the company in 2000, serving in a wide range

of technological and management positions since, including the head of R&D at Cellocator and responsibilities

for customer support and IT. He holds a Master of Engineering in Systems Engineering from the Technion-

Israel Institute of Technology.

Two large shareholders hold four of seven seats on the board of directors. Yossi Ben Shalom is Chairman, a

position he’s held since April 2003. Mr. Ben Shalom is a co-founder of D.B.S.I. Investments Ltd., a private

investment company that has made various investments in private and public companies. DBSI controls 27.5%

of the company on a fully diluted basis and two other board members besides Mr. Ben Shalom are affiliated

with DBSI. Gandyr Investments Ltd. owns 9.37% of the shares on a fully diluted basis and is affiliated with one

board member.

FRAGMENTED, COMPETITIVE TELEMATICS INDUSTRY

Telematics involves the use of wireless devices to transmit real time data, integrating mobile communications

with vehicle monitoring and location technology. We view the market as highly competitive, fragmented and

consolidating.

The Frost & Sullivan Global Connected Truck Market 2016 report estimates virtually all trucks could have

installed telematics by 2022. According to Grand View Research, the global commercial telematics industry

could be over $45 billion by 2022 from a figure closer to $20 billion in 2016.

With usage-based pricing for car insurance and connected cars the total global telematics industry could be

much higher. According to ABI Research, subscriptions for insurance telematics could exceed 107 million cars

in 2018.

In the countries in which Pointer competes, South Africa is the most penetrated market (about 40%) due to the

high level of stolen cars. Fleet service competitors in South Africa include Mix Telematics C-Track (Digicone)

and Cartrack.

Acquisition in the U.S. markets are too expensive for Pointer. It typically pays about 1x-1.5x revenue and 5x

EBITDA after synergies. The challenge is finding the right target.

Fleet service management competitors in Israel include Ituran Location & Control (ITRN, NC), ISR, Trafilog

and smaller competitors. In Brazil, competing companies include Sascar Tecnolofia E Seguranca Automotiva,

Zati, Omnitracks, Golsat and others.

Fleet service management competitors include Megatrans, and Sitrack.com in Argentina. In Mexico, Pointer

competes against Qualcom, CSI, Econotrack, Copolito, Unicome and UDA. The main competitors in South

Africa are Mix Telematics, C-Trac, and Cartrack. SVR (stolen vehicle recovery) competitors include Ituran in

Israel and LoJack and Ituran in Argentina.

Cellocator competitors in the Americas include CalAmp, Skypatrol, Digital Communications Technology

(Antare GPS), Maxtrac, Continential GPS Tracking, and Portman Security Systems International.

Cellocator competition in Europe includes Ruptela, GPS Tracking Network (Enfora), Uab Teltonika, Falcom,

Skope Solutions and Digicore Holdings. Queclink (Chinese) is increasingly a worldwide competitor.

The industry has been subject to merger and acquisition activity. For example, Verizon bought Hughes

Telematics in July 2012 for $612 million or 8.3x trailing 12-month (ttm) revenue.

CalAmp (CAMP, NC) acquired Wireless Matrix in March 2013 for $52.9 million or 1.6x ttm revenue. Revenue

at Wireless Matrix had been declining. In August 2013, Sirus XM bought the connected vehicle unit of Agero

for $530 million. Agero is a Dubln-based aircraft leasing company. TrakM8 bought Box Telematics, a UK-

based insurance telematics firm, in October 2013 for £3.5 million.

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POINTER TELOCATION LTD. Company Note - July 7, 2017

More importantly, Vista Equity Partners acquired Omnitracs from Qualcomm in November 2013 for $800

million or nearly 2.2x ttm revenue. Omnitracs acquired Roadnet Technologies in December 2013. Originally

founded in 1983 as part of United Parcel Service, Roadnet had revenue over $40 million. Terms weren’t

disclosed.

Berg Insight, a Swedish market research firm reported there were nine M&A transactions in the telematics

industry in 2014-2015. A private Russian investment group, Renova, bought Octo Telematics, an insurance

telematics business, for $555 million or approximately 6.8x ttm revenue in March 2014. In another large

transaction, Omnitracs acquired XRS in October 2014 for $178 million or nearly 3.4x ttm revenue.

ClickSoftware, which tracks vehicles for enterprises, was taken private in April 2015 by Francisco Partners

Management for $438 million or nearly 3.5x ttm revenue. It had a GAAP loss just over $3 million in 2014 and a

non-GAAP profit of $1.4 million.

Also in April 2015, Aioi Nisray Doway Insurance, a Japanese company, bought 70.01% of the Box Innovation

Group (formerly Box Telematics) for £105 million with management owning the rest. In June 2015, Novatel

Wireless acquired DigiCore, a South African telematics company, for $87 million or close to 1.6x ttm revenue.

In January 2016, Holland-based TomTom Telematics purchased Finder, a Polish-based fleet management

provider. Before that, it had picked up Fleetlogic, a Netherlands-based provider in December 2014. Terms

were not disclosed on either small transaction. In March 2016, CalAmp acquired a theft recovery system

supplier, LoJack, for $134 million or just over 1x revenue. Lojack earned nearly $2.2 million in 2015.

In July 2016, Verizon closed the acquisition of Telogis for a speculated $930 million or approximately $3,100

per subscriber. Terms were not disclosed. Telogis was a cloud-based logistics software company with about

300,000 subscribers that provided driver safety information (speed, seatbelt use, current weather conditions

and much more) to fleet operators. Telogis had raised $93 million in venture capital financing and had been

considering an IPO with about 700 employees worldwide. It was merged with Verizon’s Telematics unit

(Hughes acquisition in 2013), which operates in 40 countries worldwide.

In August 2016, Verizon announced the acquisition of a SaaS-based products and solutions telematics firm for

small-and-medium-sized businesses, Fleetmatics Group, for $2.4 billion. Fleetmatics added over 37,000

customers and 737,000 subscribers when announced and about 826,000 subscribers to Verizon Telematics

when the deal closed in November 2016. Verizon paid 10x ttm Fleetmatics revenue, 32x ttm EBITDA and

about $3,000 per subscriber.

STEADY GROWTH AND CONSISTENTLY PROFITABLE

In our opinion, the business model is one of steady growth, large enough to be consistently profitable with

MRM services (recurring revenue) accounting for about two-thirds of revenue. The company reports financial

results in dollars using GAAP accounting. Operations around the world help smooth out seasonality.

Pointer is planning for double-digit revenue growth in 2017 with expectations that product sales are flat to

slightly up for the year with potential to be higher. It has little visibility in that segment. Product sales are usually

the strongest in the first and fourth quarters.

As MRM services revenue grows, margins should improve. We estimate operating income is 10% of revenue

in 2017 versus 9.7% in 2016 and 6.0% in 2015 before the Shagrir spinout. The 1Q17 operating income margin

was 11.9%.

Cash flow from operations was almost $9.1 million in 2016, up from $8.8 million in 2015. About 80% of the

transactions are under a lease model where capital expenditures are amortized over the contract.

Pointer has two IoT R&D initiatives; the first is to track goods in transit, and the company is developing a full

platform to support that capability. The second is to develop applications for infotainment systems and

localized for each market including local maps and service.

The tax rate is complicated, a blend of about 15% in Israel and 25% in Brazil. The company reverts to a zero

rate in Israel 2020 tied to the Shagrir spin out as it is able to utilize the rest of its net loss carryfowards.

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POINTER TELOCATION LTD. Company Note - July 7, 2017

We estimate the company earns $5.6 million or $0.70 per share in 2017 on revenue growth of 17% to nearly

$74.6 million. Our 2018 model estimates 14% earnings growth to $6.5 million or $0.80 per share with 7%

revenue growth to $80 million. Although we expect Pointer to close another acquisition this year with more to

follow in 2018, potential acquisitions are not built into our estimates.

Adjusted EBITDA margins were 16.3% in 1Q17, up sequentially from 15.3% and 14.2% a year earlier. The

adjusted EBITDA margin for the full year 2016 was 13.7% in 2016. At $100 million of revenue, the company

expects adjusted EBITDA margins to reach 20%. Depending on the pace of acquisitions, we believer Point

could reach that revenue level in three to five years.

Our rating is Buy and our 12-month price target is $16 based on a multiple of 20x our 2018 earnings estimate,

which also equates to 1.6x our revenue estimate for 2018.

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POINTER TELOCATION LTD. Company Note - July 7, 2017

VALUATION

Given its growth profile, large percentage of subscription revenue and expanding margins, our 12-month pricetarget is $16 based on a multiple of 20x our 2018 earnings estimate, which also equates to 1.6x our 2018revenue estimate.

Competitors vary by country and finding a universe of comparable companies is a challenge given given thelarge number of small and private competitors in each country. Ituron Location & Control (ITRN - NC) is valuedat 3.1x ttm revenue, over 10x ttm EBITDA and 17x tom earnings. It is also valued at over $600 per subscriber.CamAmp (CAMP - NC) lost money over the past 12-months but is valued at 2.1x ttm revenue and over 20x ttmEBITDA. Product sales account for over 80% of revenue and it is valued at 17x its average earnings estimatefor 2017.

There has been considerable merger and acquisition activity in the telematics industry over the past five years.Verizon bought Hughes Telematics in 2012 for $612 million or 8.3x ttm revenue. CalAmp acquired WirelessMatrix in March 2013 for $52.9 million or 1.6x ttm revenue, which had been declining. SirusXM bought theconnected vehicle unit of Agero for $530 million in 2013 and Vista Equity Partners acquired Omnitracs fromQualcomm in November 2013 for $800 million or nearly 2.2x ttm revenue.

There were nine M&A transactions in 2014-2015 according to Berg Insight. Reno bought Octo Telematics for$555 million or 6.8x tom revenue in March 2014. Omnitracs acquired XRS in October 2014 for $178 millionor nearly 3.4x ttm revenue. Vehicle-tracker ClickSoftware was taken private in 2015 for $438 million or nearly3.5x ttm revenue. A Japanese insurance company bought 70% of Box Telematics for £105 million in 2015 andNovatel Wireless acquired South Africa-based DigiCore for $87 million or 1.6x ttm revenue.

In January 2016, TomTom Telematics purchased a Polish-based fleet management provider, Finder, for anundisclosed amount and Cal Amp bought LoJack for $134 million or just over 1.1x ttm revenue and 60xtom earnings. In July 2016, Verizon closed the acquisition of Telogis (cloud-based driver safety information),reportedly for $930 million or approximately $3,100 per subscriber. Verizon also acquired Fleetmatics for $2.4billion or 10x ttm revenue, 32x ttm EBITDA and about $3,000 per subscriber.

Pointer Telocation is valued at just over $240 per subscriber, 1.4x ttm revenue, nearly 10x tom EBITDA and30x ttm earnings. The valuation is 1.3x our 2017 revenue estimate and 1.2x our 2018 revenue estimate. Froman earnings perspective it is valued t 17x our 2017 earnings estimate and 15x our 2018 estimate.

Factors that could impede Pointer Telocation from reaching our price target include all the risk factors listedbelow, particularly a business contraction in any of the countries in which it operates as well as social upheavalor war in Israel, Brazil, Argentina and South Africa.

RISKS

Pointer Telocation's business could be adversely impacted by recession, either globally or in any of thecountries in which it operates.

Israel is vulnerable to disruption given political and military conditions and the possibility of armed conflicts asis Brazil, which is subject to economic uncertainty or volatility amidst government corruption allegations andit faces possible measures to quell social unrest in Argentina.

South Africa has considered and could implement legislation requiring at least 51% ownership by South Africancitizens for any security service provider. The company need to achieve empowerment objectives of the SouthAfrican government in order to sell to government customers in that country.

A decline in the sales of cars or commercial vehicles in countries in which Pointer operates could cause salesto slow.

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POINTER TELOCATION LTD. Company Note - July 7, 2017

Employees in some markets are members of labor unions and there are no guarantees that future demandsare reasonable. Pointer offers its customers fixed-price contracts while its costs are variable and if costs risedisproportionally more than revenue, earnings results could suffer.

Pointer faces intense competition in each market in which it operates. Competitors could introduce productsand services utilizing new technology that could be superior, resulting in Pointer losing subscribers. If vehiclemanufacturers were to embed tracking and communications technology, it could minimize the need for thecompany's technology.

Growth is dependent on the success of new products. There is also the risk of product obsolescence itdoesn't develop new products. In certain jurisdictions, the company may not be able to enforce non-competecovenants.

If insurance companies in any of the markets served by Pointer were to change their practices, it could possiblycause a downturn in sales and services.

When a business is acquired it could possibly have unforeseen problems or integration could prove moredifficult than thought.

Hacking or cyber-attacks that could shut down or harm the technology infrastructure used by Pointer.

Pointer relies on third-party operators for some services in certain countries. A failure by one of these operatorsor poor business practices could damage the company's reputation and cause a diminution in profits or actuallosses.

COMPANY DESCRIPTION

Pointer Telocation Ltd. provides mobile resource management (MRM) products and services for theautomotive, insurance industries and other mobile tracking markets worldwide. It operates in two segments:Cellocator and MRM services. The Cellocator segment designed, develops and manufacturers MRM productscomprising asset tracking; fleet management; and stolen vehicle retrieval (SVR) products consisting of remotemonitoring and control solutions, such as installation in vehicles command and control center products, andcommunication infrastructure products. Pointer Telocation was founded in 1991 and is headquartered in RoshHa'ayin, Israel.

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POINTER TELOCATION LTD. Company Note - July 7, 2017

Pointer Telelocation Ltd. - Income Statement (000)

FY - Dec 2015A 1Q-16A 2Q-16A 3Q-16A 4Q-16A 2016A 1Q-17A 2Q-17E 3Q-17E 4Q-17E 2017E 1Q-18E 2Q-18E 3Q-18E 4Q-18E 2018E

Products 28,617 5,507 6,048 5,394 5,836 22,784 6,682 6,000 5,500 6,200 24,382 7,040 6,400 5,860 6,700 26,000

Services 72,307 9,319 10,166 10,522 11,562 41,569 12,349 12,430 12,600 12,800 50,179 12,870 13,220 13,910 14,000 54,000

Total revenue 100,924 14,826 16,214 15,916 17,398 64,353 19,031 18,430 18,100 19,000 74,561 19,910 19,620 19,770 20,700 80,000

CGS - products 17,003 3,396 3,782 3,301 3,425 13,904 4,276 3,840 3,500 3,950 15,566 4,470 4,040 3,640 4,150 16,300

CGS - services 49,739 4,072 4,702 4,789 5,109 18,672 5,363 5,400 5,500 5,560 21,823 5,580 5,730 5,980 5,990 23,280

Intangible amortization 0

Gross profit 34,182 7,358 7,730 7,826 8,864 31,777 9,392 9,190 9,100 9,490 37,172 9,860 9,850 10,150 10,560 40,420

R&D 3,409 905 919 870 975 3,669 970 1,000 1,050 1,150 4,170 1,100 1,050 1,060 1,060 4,270

Selling & marketing 12,063 2,647 2,968 3,099 3,060 11,774 3,305 3,460 3,490 3,610 13,865 3,650 3,650 3,660 3,810 14,770

General & administrative 10,993 2,134 2,093 2,152 2,626 9,004 2,748 2,790 2,800 2,880 11,218 2,940 2,960 2,980 3,020 11,900

Intangible amortization 735 90 105 105 173 473 113 120 120 130 483 130 135 135 140 540

Impairment/M&A 1x 917 200 409 609 0 0

Operating income 6,065 1,582 1,645 1,400 1,621 6,248 2,256 1,820 1,640 1,720 7,436 2,040 2,055 2,315 2,530 8,940

Interest, net (869) 80 (323) (379) (422) (1,046) (160) (220) (250) (250) (980) (220) (200) (190) (180) (790)

Other 6 4 (2) (8) (4) (9) 0

Pre-tax 5,202 1,667 1,320 1,013 1,195 5,193 2,096 1,820 1,640 1,720 7,436 1,820 1,855 2,125 2,350 8,150

Taxes 1,404 577 276 298 694 1,845 529 455 410 430 1,824 364 371 425 470 1,630

Affiliate equity/non-controlling

Discontinued 323 (168) 154

Net income 3,798 1,413 876 715 501 3,502 1,567 1,365 1,230 1,290 5,612 1,456 1,484 1,700 1,880 6,520

EPS $0.50 $0.14 $0.11 $0.09 $0.06 $0.42 $0.19 $0.17 $0.15 $0.16 $0.70 $0.18 $0.18 $0.21 $0.23 $0.80

Shares 7,725 7,915 7,934 7,968 7,960 7,938 8,031 8,060 8,090 8,100 8,070 8,110 8,180 8,240 8,270 8,200

Margins:

CGS - products 59.4% 61.7% 62.5% 61.2% 58.7% 61.0% 64.0% 64.0% 63.6% 63.7% 63.8% 63.5% 63.1% 62.1% 61.9% 62.7%

CGS - services 68.8% 43.7% 46.3% 45.5% 44.2% 44.9% 43.4% 43.4% 43.7% 43.4% 43.5% 43.4% 43.3% 43.0% 42.8% 43.1%

Gross profit 33.9% 49.6% 47.7% 49.2% 50.9% 49.4% 49.4% 49.9% 50.3% 49.9% 49.9% 49.5% 50.2% 51.3% 51.0% 50.5%

Selling & marketing 12.0% 17.9% 18.3% 19.5% 17.6% 18.3% 17.4% 18.8% 19.3% 19.0% 18.6% 18.3% 18.6% 18.5% 18.4% 18.5%

G&A 10.9% 14.4% 12.9% 13.5% 15.1% 14.0% 14.4% 15.1% 15.5% 15.2% 15.0% 14.8% 15.1% 15.1% 14.6% 14.9%

R&D 3.4% 6.1% 5.7% 5.5% 5.6% 5.7% 5.1% 5.4% 5.8% 6.1% 5.6% 5.5% 5.4% 5.4% 5.1% 5.3%

Operating income 6.0% 10.7% 10.1% 8.8% 9.3% 9.7% 11.9% 9.9% 9.1% 9.1% 10.0% 10.2% 10.5% 11.7% 12.2% 11.2%

Pre-tax 5.2% 11.2% 8.1% 6.4% 6.9% 8.1% 11.0% 9.9% 9.1% 9.1% 10.0% 9.1% 9.5% 10.7% 11.4% 10.2%

Taxes 27.0% 34.6% 20.9% 29.4% 58.1% 35.5% 25.2% 25.0% 25.0% 25.0% 24.5% 20.0% 20.0% 20.0% 20.0% 20.0%

Net income 3.8% 9.5% 5.4% 4.5% 2.9% 5.4% 8.2% 7.4% 6.8% 6.8% 7.5% 7.3% 7.6% 8.6% 9.1% 8.2%

Revenue change -36% 28% 14% 14% 9% 16% 5% 6% 9% 9% 7%

EPS change -8% 36% 54% 69% 165% 66% -6% 7% 36% 43% 14%

Source: SEC filings and ROTH Capital Partners LLC estimates

William Gibson, CFA

(415) 515-8074

[email protected]

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POINTER TELOCATION LTD. Company Note - July 7, 2017

Pointer Telelocation (PNTR) - Balance Sheet (000)

Yr - Dec 2013A 2014A 2015A 1Q-16A 2Q-16A 3Q-16A 4Q-16A 1Q-17A

Cash 3,430 8,619 9,347 8,655 7,745 14,066 6,066 5,754

Trade receivables 19,793 19,032 18,402 22,842 11,627 10,865 11,464 12,845

Other A/R & prepaid 2,033 1,853 2,040 2,718 2,360 2,185 2,504 3,155

Inventory 6,038 6,133 4,866 4,740 4,416 4,777 5,242 5,485

Dfd tax asset 901

Held for sale 1,034 282 49

Current Assets 31,294 37,572 34,937 39,004 26,148 31,893 25,276 27,239

L-T loan (related) 820 838 831 892

A/R 546 408 490 607 499 543 564 618

Severance fund 9,349 8,609 8,186 8,554 3,000 3,127 2,878 3,129

PP&E, net 13,975 10,075 9,112 10,355 3,614 3,867 5,614 5,843

Intangibles, net 2,936 1,950 816 712 398 292 2,178 2,126

Goodwill 55,127 48,941 46,753 48,419 32,208 38,820 38,107 39,998

Dfd tax asset 3,449 3,144 2,450 2,202 1,852 1,433 1,097

Assets 113,227 111,004 103,438 101,101 68,889 75,232 76,881 53,703

S-T & current L-T debt 10,643 7,478 4,905 4,963 4,572 4,730 4,836 5,008

Trade payables 14,793 11,460 11,776 13,934 5,871 6,054 7,116 6,957

Dfd revenue & customer advances 7,753 6,420 5,843 7,134 735 692 1,037 1,162

Other payables & accrued 10,768 8,972 7,928 8,045 6,160 5,272 6,839 7,570

Current Liabilities 43,957 34,330 30,452 34,076 17,338 16,751 19,828 20,697

Bank loans 9,301 12,046 8,385 7,361 6,340 11,563 10,182 8,809

Shareholder loans & other 1,301 997 180 185

Dfd taxes & other 5,712 298 258 321 331 336 976 1,015

Accured severance 10,317 9,537 9,128 9,574 3,429 3,478 3,206 3,530

Liabilities 70,588 57,208 39,588 51,517 27,438 32,128 34,192 34,051

Common & paid-in 124,874 135,323 134,180 133,914 133,958 134,132 134,275 134,462

Comprehensive 1,456 (2,909) (6,254) (4,042) (5,351) (4,588) (5,633) (3,188)

Retained earnings (89,220) (75,767) (71,822) (70,441) (87,316) (86,604) (86,115) (84,558)

Non-controlling 5,529 (2,851) (1,068) (487) 160 164 162 174

Equity 37,110 56,647 56,104 59,071 41,291 42,940 45,527 46,717

Liabilities & Equity 113,227 111,004 103,438 110,101 68,889 75,232 76,881 80,942

Source: SEC filings

William Gibson, CFA

ROTH Capital Partners LLC

(415) 515-8074

[email protected]

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POINTER TELOCATION LTD. Company Note - July 7, 2017

Regulation Analyst Certification ("Reg AC"): The research analyst primarily responsible for the content of this report certifiesthe following under Reg AC: I hereby certify that all views expressed in this report accurately reflect my personal viewsabout the subject company or companies and its or their securities. I also certify that no part of my compensation was, isor will be, directly or indirectly, related to the specific recommendations or views expressed in this report.

Disclosures:

ROTH makes a market in shares of Pointer Telocation Ltd. and as such, buys and sells from customers on a principal basis.

Each box on the Rating and Price Target History chart above represents a date on which an analyst made a change to arating or price target, except for the first box, which may only represent the first note written during the past three years.Distribution Ratings/IB Services shows the number of companies in each rating category from which Roth or an affiliatereceived compensation for investment banking services in the past 12 month.

Distribution of IB Services Firmwide

IB Serv./Past 12 Mos.as of 07/07/17

Rating Count Percent Count Percent

Buy [B] 207 69.93 107 51.69Neutral [N] 45 15.20 23 51.11Sell [S] 6 2.03 3 50.00Under Review [UR] 37 12.50 22 59.46

Our rating system attempts to incorporate industry, company and/or overall market risk and volatility. Consequently, at anygiven point in time, our investment rating on a stock and its implied price movement may not correspond to the stated 12-month price target.

Ratings System Definitions - ROTH employs a rating system based on the following:

Buy: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return of at least10% over the next 12 months.

Neutral: A rating, which at the time it is instituted and or reiterated, that indicates an expectation of a total return betweennegative 10% and 10% over the next 12 months.

Sell: A rating, which at the time it is instituted and or reiterated, that indicates an expectation that the price will depreciateby more than 10% over the next 12 months.

Under Review [UR]: A rating, which at the time it is instituted and or reiterated, indicates the temporary removal of theprior rating, price target and estimates for the security. Prior rating, price target and estimates should no longer be reliedupon for UR-rated securities.

Not Covered [NC]: ROTH does not publish research or have an opinion about this security.

ROTH Capital Partners, LLC expects to receive or intends to seek compensation for investment banking or other businessrelationships with the covered companies mentioned in this report in the next three months. The material, information andfacts discussed in this report other than the information regarding ROTH Capital Partners, LLC and its affiliates, are fromsources believed to be reliable, but are in no way guaranteed to be complete or accurate. This report should not be used asa complete analysis of the company, industry or security discussed in the report. Additional information is available upon

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POINTER TELOCATION LTD. Company Note - July 7, 2017

request. This is not, however, an offer or solicitation of the securities discussed. Any opinions or estimates in this report aresubject to change without notice. An investment in the stock may involve risks and uncertainties that could cause actualresults to differ materially from the forward-looking statements. Additionally, an investment in the stock may involve a highdegree of risk and may not be suitable for all investors. No part of this report may be reproduced in any form without theexpress written permission of ROTH. Copyright 2017. Member: FINRA/SIPC.