The Pie Australian Dividend Fund and The Pie Growth 2 Fund recently took a position in Gentrack Group (GTK). GTK develops, implements and supports enterprise billing software solutions for utilities and airports in New Zealand, Australia, and the UK. It had a troubled start to life as a listed company, but we believe that things are heating up at this Kiwi world-beater. GTK listed in 2014 and proceeded to downgrade six weeks later, due to a delay in a contract with a major customer. GTK was severely punished by the market and in 2015 it appointed new chief executive Ian Black to lead a turnaround in the business. GTK recently proved that the turnaround is in full force, smashing expectations at its first-half result. GTK beat guidance with revenue up 26% on the previous corresponding period to $23.3 million (guidance: 20%) and Earnings Before Interest, Taxes, Depreciation and Amortisation (EBITDA) up 22% on the previous corresponding period to $6.7 million (guidance: 20%).
The UK market continued to outperform, with revenue increasing 80% on the previous corresponding period to now represent 22% of all revenue. Despite a weaker GBP/NZD, the highly sticky nature of GTK’s customers (utilities), and the mission-critical nature of its software means that the business is unlikely to be affected by the noise associated with Brexit.
We believe that GTK’s performance will carry into the 2017 financial year, supported by industry tailwinds in the utilities sector, driven by deregulation of the electricity and water markets in the UK and Australia.
GTK has $12 million cash, no debt and has signalled a desire to make an acquisition using debt up to 1x EBITDA. We believe an acquisition on a 6x multiple could add +20% to FY17 EBITDA.
No Analyst Coverage
GTK has a $200 million market cap, is growing revenue at +20%, is highly profitable and… has no analyst coverage. Uncovering hidden gems which have fallen off the radar is a hallmark of our investment strategy. Better still, we believe that there is a good chance that some broker houses could soon pick up coverage. More coverage means more eyes and the prospect of both multiple and earnings expansion.
Like Hansen, but cheaper
The closest comparable listed company is Hansen (ASX. HSN) which, like GTK, develops, implements and supports billing software solutions for customers in the gas, electricity, pay TV and water industries. GTK is trading at a significant discount to HSN on key metrics, including revenue growth, margins, and valuation. What’s interesting is that HSN is growing by acquiring assets in sunset industries (for example, pay TV) and by acquiring assets, it’s capitalising its research and development (which GTK expenses), so the valuation gap is even larger than it appears.
In summary, GTK has a large addressable market, high revenue growth, sticky customers, high margins and a great balance sheet. Trading 16x PER FY17 with a 4% yield, GTK is trading at a steep discount to listed software comparables, due to its poor operating history and lack of research coverage. We believe that these factors will be corrected over the next 12 months and that GTK will benefit from earnings and multiple expansion.
Article originally appeared in "A Slice of Pie", the Pie Funds newsletter: (VIEW LINK)
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