Higher Margins Underpin Gentrack’s Ambitions

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

The positive trend for Gentrack Group continues with FY24 results triggering higher margin forecasts from analysts.

-Gentrack Group’s FY24 revenue exceeds guidance
-Falling non-recurring revenue fears prove unfounded
-Analysts increase long-term margin forecasts
-A sceptical Jarden suggests shares are priced for perfect execution

By Mark Woodruff

Since 2023, Gentrack Group’s ((GTK)) share price has risen steadily from $2.44 to nearly $12 today, marked by sharp increases every May and November as half-year results consistently exceeded market expectations.

In fact, Shaw and Partners estimates management has delivered revenue over FY22 to FY24 on average 20-30% above initial guidance.

November 2024 was no exception after this week’s FY24 results for Gentrack alleviated market concerns around the impact of falling non-recurring revenue (NRR) from project work on a fixed cost base, explains Wilsons.

Shares jumped by over 25% to be trading around $12.00.

Shaw now views FY25 consensus forecasts as achievable and sees FY26 earnings margins potentially reaching the upper end of management’s target range, supporting a more optimistic market outlook on long-term margin potential.

Gentrack designs, develops, implements, and supports specialist software solutions for electricity, gas, and water utilities, as well as airports.

The group offers a cloud-based SaaS service with increased capabilities around complex data sets for smart meters and more diversified energy and water grids.

The utilities platform (g2) is designed to support the core billing, customer care and collections processes with Salesforce Sales Cloud integrated in the front-end.

Veovo, the aviation software platform, covers the operational management of airports including passenger forecasting, queue management and flight and gate information.

Exceeding management’s guidance of around NZ$200m, Gentrack generated NZ$213.2m in revenue, beating the consensus forecast by 5% due to higher-than-expected hardware sales in the airports division, explains Wilsons.

Growing by 25% on FY23, revenue gains were broad-based across operating units, recurring/non-recurring sources and regions, comments Bell Potter.

Free cash flow (FCF) also rebounded materially in the second half, while an 11% earnings margin came in at the bottom of guidance range due to higher-than-expected long-term incentive (LTI) costs.

If an around -NZ$4m impact from higher long-term LTI-related payroll taxes is excluded, Shaw suggests earnings would have exceeded by 12% the mid-point of management guidance for between NZ$23.5-26.5m.

Due to uncertain timing around potential deals closing and timing of revenue recognition in FY25, management was only able to reiterate medium-term targets, though upside risk to the 15% revenue compound annual growth rate (CAGR) was flagged at the later conference call for analysts.

FY24 highlights, according to Jarden, were strong cash generation, new logo wins in Asia and SaudiArabia, and traction on the group’s g2 stack, with the first customer going live with NZ-listed Genesis Energy running to plan.

Margins

Gentrack does not disclose gross margins and has a meaningful proportion of sales from low margin, transactional consulting, explains Morgan Stanley.

Demonstrating clear operating leverage, Shaw highlights underlying cash earnings expanded by 2.2 percentage points ex payroll. It’s felt long-term margins of over 25% are achievable.

Reaching even higher, Morgan Stanley believes 30% earnings margins are possible, exceeding management’s medium-term target of between 15-20%. This broker points out 220bps of improvement was recorded as sales grew at 25% (51% excluding UK insolvencies).

Revenue growth included a greater mix of lower margin consulting and hardware sales, making the expansion story more compelling, in this analysts’ view.

Software peers like Hansen Technologies ((HSN)), Infomedia ((IFM)), and TechnologyOne ((TNE)) are delivering cash margins in the mid-20% range, points out Shaw.

The sceptic

Conceding Gentrack is displaying enviable momentum, has a strong pipeline, and the absence of any near-term negative catalysts, Jarden highlights risk associated with the binary nature of contracts and the replacement hurdle for the substantial portion of non-recurring revenues (NRR).

Jarden also highlights the competitive nature of the overall market, which is seeing significant investment, and the weight of expectations priced into the stock.

On this broker’s assessment, the current share price implies a 10-year revenue compound annual growth rate (CAGR) of 18% at a 29% EBITDA margin. While this outcome is achievable, it’s felt shares are priced for perfect execution.

On the flipside, in the event of sizeable contract wins, Jarden notes a greater and earlier-than-expected reset of the revenue base would likely drive greater confidence in management’s ability to win other large utility customers and support the high valuation.

Non-recurring revenue

Displaying strong ongoing operating momentum, observes Jarden, underlying FY24 revenue jumped by 50%, supported by a 102% lift in NRR, aided by product upgrades and onboarding new logos, and a 31% increase for annual recurring revenue (ARR).

NRR comprised 36% of the underlying revenue base in FY24, up from 26% in the previous corresponding period, lifting the replacement hurdle into FY25, notes the broker.

Positively, the NRR measure is a lead indicator of future subscription revenue, highlights Morgan Stanley, and management expects to see further year-on-year growth in NRR in FY25, underpinned by already announced wins and the pipeline of project work and new customer onboards.

Outlook

Key drivers of the next major upward leg in Gentrack shares, suggest Wilsons, is a Tier-1 Energy signing in southeast Asia, and a maiden win in UK B2C Water, potentially in the second half of FY25.

Wilsons understands the deal pipeline is deep and broad across both Energy and Water markets, with management seeking contracts wins in both UK B2C Water and in UK B2B Water.

Management noted most customer conversations are about g2. Morgan Stanley believes this provides potential for 50% revenue expansion for most of these customers.

Bell Potter is bullish on management’s ability to maintain customer win momentum in both core markets and the rest of the world (ROW) supporting high NRR revenues, with flow on benefits for ARR.

Of the three Buy-rated (or equivalent) daily monitored brokers covering Gentrack Group in the FNArena database, the average 12-month target price following FY24 results rose to $13.07 from $11.43, suggesting around 11% upside to the latest share price.

Outside of daily monitoring, Wilsons raised its target to $12.50 from $11.50 and downgraded to Market Weight from Overweight on valuation.

Jarden maintained an Underweight rating though raised its target to NZ$7.65 from NZ$7.00.

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