Can Gentrack Live Up To Its Shareprice?

Small Caps | Jul 11 2024

This story features GENTRACK GROUP LIMITED, and other companies. For more info SHARE ANALYSIS: GTK

Gentrack is emerging as a potential key player in the cloud native, SaaS based utility meters sector, where utilities are under invested and thus requiring a major upgrade cycle, in the transition to sustainability and net zero emissions.

-Gentrack’s investment thesis carried by a positive narrative
-Utilities globally looking beyond the more traditional ERP software 

-Where the brokers differ
-Overseas expansion in the distance
-How stretched is the valuation?

By Danielle Ecuyer

The new cloud-based SaaS provider on the block

Gentrack Group ((GTK)) recently joined the ASX All Technology Index after listing on the ASX and the NZX ten years ago. The shares have risen by some 235%, from $4 at the start of 2024 to around $9.80, pushing market capitalisation to just over $1bn.

Top shareholders include Milford Asset Management, Australian Ethical Investment, Regal Funds and Wilson Asset Management in order of magnitude from largest down.

Bell Potter recently initiated coverage and described Gentrack as “an enterprise billing and Customer Relationship Management developer and integrator.”

The company serves energy/water utilities and airport/adjacent industries, with utilities representing 85% of total revenues. 

The Gentrack investment case

Bell Potter outlines what seems like a straightforward investment case for Gentrack, underpinned by an overdue utility metre upgrade cycle and the IT infrastructure transition in the utility industry. Think smart meters for distributed energy sources such as solar, wind and battery storage, explains the analyst.

The changes also come at a time when utilities are potentially looking beyond the more traditional enterprise resource planning (ERP) software offering from the legacy providers SAP and Oracle, which retain the lion’s share of meter points, according to the latest update from Shaw and Partners.

What comes across as quite a fragmented and competitive market under Shaw and Partners’ analysis, including Kraken (20% owned by Origin Energy ((ORG)) via Octopus); Hansen Technologies ((HSN)) and Kaluza (20% owned by AGL Energy ((AGL)), provides potential growth opportunities.

The strategic growth market for Gentrack centres around the company’s belief that 76% of global utilities currently use the incumbent, legacy software of more general enterprise resource planning (ERP) software solutions, leaving a gap in the market for smarter industry-specific solutions.

Enter Gentrack and its updated legacy billing/customer relationship manager platforms of Junifer and Velocity to g2.0, by incorporating Salesforce CRM which allows for the billing platform to be a cloud native and able to create data analytics. Ultimately, Gentrack offers a smarter cloud based SaaS service with increased capabilities around complex data sets for smart meters and more diversified energy and water grids.

Bearing in mind management has targeted 15% p.a. revenue growth over the medium term, Shaw and Partners shock and surprise wasn’t contained on learning this goal could be achieved via the successful roll out of the new g2.0 service across the existing customer base with the addition of 10m new meters.

To provide some context, the analyst estimates there are circa 1.7bn meter points globally across the Top 18 billing vendors (SAP/Oracle etc) and Gentrack needs to achieve some 3-4% of the expected churn to grow its meter base to the 10m target.

In the analyst’s view, this relatively low hurdle mitigates the perceived risks of growing revenue 15% p.a. off an ever-higher base.

1H24 earnings bring Gentrack back to reality

Sounds like a good story, well, not so fast according to Jarden’s recent report on the 1H24 earnings results.

The analyst states the “weight of expectations already priced into the stock which, given both the competitive nature of the market and the lumpy nature of new wins, elevates the risk.”

As usual the devil is in the detail, with Jarden cautious on management’s ability to grow non-recurring revenue (NRR) due to competitive pressures for new business on which the forecasts rely.

Jarden calculates the share price (NZ$9.44 at the time of writing) was discounting a 10-year compound average revenue growth of 16% p.a. and an EBITDA margin of 27.5% which the analyst doesn’t believe is achievable. More on margins soon.

Taking a step back, Jarden does highlight Gentrack reported another strong 1H24 revenue result and an upgrade to FY24 guidance by 18% to around NZ$200m, from at least NZ$175m in previous guidance.

1H24 revenue rose 58% year-on-year to NZ$102m and 2H24 revenue guidance implies a flat result which Jarden explains is due to the variability of the project work, i.e., non-recurring revenue from new business wins.

Picking apart the details of the 1H24 report, the broker highlights similar growth across Utilities and Veovo (airports) generated by new customer wins and upgrades/upsells for the installed base.,

Jarden hasn’t split out new non-recurring revenue (NRR) versus average recurring revenue (ARR) for existing customers, but forecasts an NZ$5m increase in annual recurring revenues (ARR) for the 2H24.

Shaw and Partners explains NRR generated NZ$28.9m in sales in the 1H24, with an estimated NZ$22m-NZ$23m in the 2H24 and ARR is forecast to generate NZ$62m-NZ$62.5m in the 2H24.

By FY29, Shaw and Partners expects ARR from utilities will expand to 74% of total revenue and 84% over the longer term.

Looking ahead, Bell Potter forecasts ARR as a percentage of total revenue at 65% and growing at 18%p.a. over a three-year period. This analyst anticipates NRR from new customer acquisition precedes the recurring SaaS revenues and quotes the percentage divergence in ARR historically between 50%-80% of total revenue.

Margins, the big debate

With the company turning to investment opportunities, Jarden envisages the company will manage EBITDA margins at the lower end of the 15% to 20% range in the near term.

Jarden views the 15% revenue growth target will require growth in the existing customer base and new opportunities in Australia. The international markets are not expected to contribute until at least FY25.

Shaw and Partners builds the bull base for Gentrack based on the ability for the company to grow its utility business revenues by 15% p.a. and airports at 9% p.a.

In calculating the forecasts, Shaw and Partners assume g2.0 can add around NZ$50m of recurring revenue and NZ$160m of non-recurring revenue through to FY29 with around an estimated 30m meter points.

The recurring revenue expectations are derived from other software vendor cloud migrations such as TechnologyOne ((TNE)), Objective Corp ((OCL)) and ReadyTech Holdings ((RDY)).

Genesis Energy (NZ) is the first customer to migrate to g2.0. The project is on schedule and will continue to FY26.

Shaw and Partners expect this successful transition could act as a catalyst for Gentrack’s outstanding 60 utility customers to also migrate.

But a re-rating of the stock depends in large part on Gentrack’s ability to increase its EBITDA margins to the upper end of the guidance range (15%-20%). 

Shaw and Partners consider this range suffices for a faster growing company, but as it matures the expectation is for higher EBITDA margins due to operating leverage as ARR scales and the revenue mix improves.

Shaw and Partners has a robust EBITDA terminal margin forecast of 30%. 

Bell Potter observes capitalising R&D expenditure would increase EBITDA margins to 24% for the broker’s FY24 forecast against 13%, including R&D as an expense.

Longer term, Gentrack expects with an improving SaaS based recurring revenue profile and a stable cost base, margins can expand to 30%, including the expensing of R&D.

Overseas expansion

As part of Gentrack’s growth strategy, international expansion will continue to be part of the mix.

Management is looking to five South East Asian markets, but has tempered expectations to no significant updates until FY25 at the earliest.

Bell Potter points to the recently opened Singapore office and a UK base, as well as the Riyadh office to expand into Saudi Arabia.

Jarden believes a win in any of these markets would be a significant confidence boost for investors.

Shaw and Partners also emphasises the increased customer stability post new management. This analyst showcases the renewal of Pulse Energy in 2022; Mercury adopting its platform as part of its Trustpower acquisition; Genesis becoming the first customer to transition to g2.0 after going to market, and UK customers boosting spending by 85% for Managed Services.

In Australia, utility revenue has compounded at 20% p.a. over the last four years and is expected to be a growth driver for the company, including a recent -NZ$12m investment in Amber, the smart electricity retailer.

Targets and valuations

Jarden remains cautious on the company with the lowest target price of NZ$7 at the time of the 1H24 results release in late May.

Shaw and Partners’ target price stands at $10 with a Buy, High Risk rating.

This broker calculates the stock is trading at a FY25 EV/cash EBITDA multiple of 22x which compares to TechnologyOne at 45x, with cash profits growing at 21%; ReadyTech on 22x, growing at 33%, and Hansen Technologies at 14x growing at 1%.

Bell Potter initiated coverage with a Buy rating and $10.90 target price referring to the Bloomberg consensus EV/EBITDA valuation at 42x FY24 estimates and 29x FY25. This is above the long-term average at 25x.

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