When we first looked at Gentrack, we thought the billing software maker had decent growth prospects: ‘Over time, we expect the company to achieve overall growth of around 4–6% a year, with Gentrack benefiting from a worldwide trend towards privatising and deregulating utilities’.
We were well off the mark. In the two years since then, revenue has risen 56% and net profit has risen 78%. The share price has more than doubled since we upgraded the stock to Buy on 12 Aug 15 (Buy – $1.80).
Gentrack’s latest interim result didn’t disappoint. Revenue rose 24% to NZ$29m compared to the prior corresponding period thanks to strong organic growth and new projects.
Services revenue bonanza
Dip in airport sales is temporary
Project services revenue rose an impressive 62%. These sales, however, are earned from one-off projects – which account for 40% of total revenue – and are more sensitive to the general economy than subscription fees and licences. Revenue from recurring fees and support services is the figure we’re most interested in, but that too didn’t disappoint, growing 9%.
The company added several new customers including Pulse Utilities, Vector and Ovo Energy in Australia, New Zealand and the UK, which is no small feat given the complexity and expense for utility customers to switch billing providers. Revenue for the Utilities division rose a hearty 50%.
Chairman and major shareholder John Clifford said: ‘The acquisitions expand our addressable market, our industry expertise and capability, and we remain confident of our long-term growth driven by structural reforms in the energy markets, power and water sectors.’ Management said it expects the underlying Gentrack business to grow revenue at least 10% prior to the acquisitions – though maybe not this next half, as we’ll get to in a moment.
Airports no concern
The company’s Airports division – 12% of total revenue – makes airport operating systems that manage aeronautical billing, flight information displays and baggage handling. It had a poor first half with revenue down 11%, though we aren’t too concerned. Revenue rose 36% this time last year, and the current result is a reminder that project timing has a big swing effect on sales.
|Six months to March||2017||2016|| /–
|EPS (NZ cents)||7.7||5.2||46|
|Interim dividend||4.2 NZ cents (unchanged),
unfranked, ex date 13 June
Gentrack is by far the dominant supplier of airport software in Australia and New Zealand, with its system installed at 85% of the region’s airports. During the half, the company expanded abroad, signing new deals with airports in the USA and Greenland.
Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 31% to NZ$8.8m, which boosted the company’s EBITDA margin from 29% to 30% due to the higher-margin project services work. This was despite the company increasing its headcount by 24% in anticipation of future growth, leading to a 26% jump in employee expenses and recruitment costs (and a lack of free cash flow during the period due to the upfront investment).
Management expects EBITDA growth of around 20% excluding acquisition costs in 2017, which caused a stir among analysts on the conference call and is probably what led to yesterday's 5% share price fall despite the impressive result. EBITDA growth of 20%, which would include earnings from the recent acquisitions, implies the core Gentrack business will barely grow at all in the second half. Management reiterated that because the company deals with large projects, sales can be volatile from one half to the next.
Despite that slight stain, this was an excellent result for Gentrack and the stock trades on an underlying price-earnings ratio of around 30, with a dividend yield of 2.6%. It isn't the bargain it once was but, with captive customers, a clean balance sheet, recurring revenues and decent growth prospects, we continue to recommend you HOLD.
Disclosure: The author owns shares in Gentrack.