New Zealand Professional Investment Services Firm, Forsyth Barr

Forsyth Barr

New Zealand Professional Investment Services Firm

We are proud to be a New Zealand owned firm, with 21 offices throughout the country and over 300 employees. We assist personal, institutional and corporate clients providing a full range of investment services.

Forsyth Barr is a foundation New Zealand Exchange firm (NZX) and accredited market participant. We have been confirmed by the Financial Markets Authority as a Qualifying Financial Entity (QFE).

Research is the cornerstone of our advice. We have one of New Zealand's leading teams of analysts. Our global affiliations ensure comprehensive research coverage of all major investment markets.

Equity Bottom-Up

<h2>Gentrack</h2>
FY19 Result Initial Thoughts
Gentrack’s (GTK)&nbsp;<a href="https://en.wikipedia.org/wiki/Annus_horribilis" target="_blank" data-saferedirecturl="https://www.google.com/url?q=https://en.wikipedia.org/wiki/Annus_horribilis&amp;source=gmail&amp;ust=1574982412876000&amp;usg=AFQjCNEwfz-FZg4lkgXgDrR7ggVzAk23AQ" rel="noopener">annus horribilis, which included multiple downgrades and an outlook substantially down on previous market expectations, has reset the base for forward earnings but also resulted in management providing enhanced disclosure of its business and market opportunity.</a>
<ul>
<li>At a divisional level, utilities experienced a -23% decline in EBITDA in a challenging environment particularly in the UK. &nbsp;Airports experienced margin slippage with a -4% decline in EBITDA despite a +21% revenue lift.&nbsp;</li>
<li>Bad and doubtful debts totalled NZ$2.4m, up from NZ$0.2m in the prior year reflective of a number of UK based customer failures.</li>
<li>GTK capitalised NZ$5.1m of R&amp;D in the period, up from NZ$3.7m in FY18.</li>
<li>GTK’s SaaS incursion continues to improve business quality. Annual recurring revenue has increased to NZ$67.9m, representing ~61% of total revenue from ~52% in FY18.</li>
<li>The company fully wrote-down the value (NZ$14.6m) of its investment in CA Plus in 1H19 (Concessionaire Analyser; an airport retail concession product) due to poor performance of the business since it was acquired in 2017.</li>
</ul>
Outlook
Management provided FY20 guidance last week: “Expect FY20 results broadly flat” as “UK market conditions remain unpredictable”.
Our view
GTK’s result presentation provides a welcome improvement in disclosure on its market opportunity though we are conscious that it hasn’t reiterated its +15% organic EBITDA growth objective over the longer term. While we continue to acknowledge the market opportunity exists and GTK’s business quality continues to improve, until we have more confidence in the medium term earnings trajectory, the share price appears stretched at 35x-40x one year forward PE.&nbsp;
Result summary (NZ$m)
<table class="table table-striped">
<tbody>
<tr>
<td style="width: 96.9pt;">
&nbsp;
</td>
<td style="width: 47.8pt;">
FY18
</td>
<td style="width: 47.8pt;">
FY19
</td>
<td style="width: 47.8pt;">
Change
</td>
<td style="width: 47.8pt;">
Forsyth Barr
</td>
<td style="width: 47.8pt;">
Guidance
</td>
</tr>
<tr>
<td style="width: 96.9pt;">
Sales revenue
</td>
<td style="width: 47.8pt;">
104.5
</td>
<td style="width: 47.8pt;">
111.7
</td>
<td style="width: 47.8pt;">
7%
</td>
<td style="width: 47.8pt;">
110.0
</td>
<td style="width: 47.8pt;">
~112
</td>
</tr>
<tr>
<td style="width: 96.9pt;">
EBITDA
</td>
<td style="width: 47.8pt;">
31.0
</td>
<td style="width: 47.8pt;">
24.8
</td>
<td style="width: 47.8pt;">
-20%
</td>
<td style="width: 47.8pt;">
25.7
</td>
<td style="width: 47.8pt;">
&lt;NZ$25m
</td>
</tr>
<tr>
<td style="width: 96.9pt;">
R&amp;D amortisation
</td>
<td style="width: 47.8pt;">
n/a
</td>
<td style="width: 47.8pt;">
(0.9)
</td>
<td style="width: 47.8pt;">
n/a
</td>
<td style="width: 47.8pt;">
(1.2)
</td>
<td style="width: 47.8pt;"></td>
</tr>
<tr>
<td style="width: 96.9pt;">
Acquisition related amortisation
</td>
<td style="width: 47.8pt;">
n/a
</td>
<td style="width: 47.8pt;">
(2.6)
</td>
<td style="width: 47.8pt;">
n/a
</td>
<td style="width: 47.8pt;">
(2.6)
</td>
<td style="width: 47.8pt;"></td>
</tr>
<tr>
<td style="width: 96.9pt;">
EBIT
</td>
<td style="width: 47.8pt;">
24.0
</td>
<td style="width: 47.8pt;">
15.4
</td>
<td style="width: 47.8pt;">
-36%
</td>
<td style="width: 47.8pt;">
15.6
</td>
<td style="width: 47.8pt;"></td>
</tr>
<tr>
<td style="width: 96.9pt;">
Reported NPAT
</td>
<td style="width: 47.8pt;">
13.9
</td>
<td style="width: 47.8pt;">
(3.3)
</td>
<td style="width: 47.8pt;">
-124%
</td>
<td style="width: 47.8pt;">
(4.3)
</td>
<td style="width: 47.8pt;"></td>
</tr>
<tr>
<td style="width: 96.9pt;">
Underlying NPAT
</td>
<td style="width: 47.8pt;">
14.0
</td>
<td style="width: 47.8pt;">
10.9
</td>
<td style="width: 47.8pt;">
-23%
</td>
<td style="width: 47.8pt;">
10.3
</td>
<td style="width: 47.8pt;"></td>
</tr>
<tr>
<td style="width: 96.9pt;">
Underlying EPS (cents)
</td>
<td style="width: 47.8pt;">
16.2
</td>
<td style="width: 47.8pt;">
11.0
</td>
<td style="width: 47.8pt;">
-32%
</td>
<td style="width: 47.8pt;">
10.5
</td>
<td style="width: 47.8pt;"></td>
</tr>
<tr>
<td style="width: 96.9pt;">
Final DPS (cents)
</td>
<td style="width: 47.8pt;">
8.7
</td>
<td style="width: 47.8pt;">
3.0
</td>
<td style="width: 47.8pt;">
-66%
</td>
<td style="width: 47.8pt;">
4.0
</td>
<td style="width: 47.8pt;"></td>
</tr>
<tr>
<td style="width: 96.9pt;">
Capitalised R&amp;D
</td>
<td style="width: 47.8pt;">
3.7
</td>
<td style="width: 47.8pt;">
5.1
</td>
<td style="width: 47.8pt;">
37%
</td>
<td style="width: 47.8pt;">
5.3
</td>
<td style="width: 47.8pt;"></td>
</tr>
</tbody>
</table>
Source: GTK, Forsyth Barr analysis
Andy Bowley Head of Research Forsyth Barr Limited
T:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; +64 4 495 8246 M:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;+64 21 338 941 TF:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; 0800 367 227 F:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; +64 4 495 8193 P:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; PO Box: 5266, Wellington 6145 W: &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; <a href="https://foundry.smartkarma.com/www.forsythbarr.co.nz" target="_blank" rel="noopener">www.forsythbarr.co.nz</a> Twitter:&nbsp; @forsythbarr

Gentrack
FY19 Result Initial Thoughts
Gentrack’s (GTK)&nbsp;annus horribilis, which included multiple downgrades and an outlook substantially down on previous market expectations, has reset the base for forward earnings but also resulted in management providing enhanced disclosure of its business and market opportunity.

At a divisional level, utilities experienced a -23% decline in EBITDA in a challenging environment particularly in the UK. &nbsp;Airports experienced margin slippage with a -4% decline in EBITDA despite a +21% revenue lift.&nbsp;
Bad and doubtful debts totalled NZ$2.4m, up from NZ$0.2m in the prior year reflective of a number of UK based customer failures.
GTK capitalised NZ$5.1m of R&amp;D in the period, up from NZ$3.7m in FY18.
GTK’s SaaS incursion continues to improve business quality. Annual recurring revenue has increased to NZ$67.9m, representing ~61% of total revenue from ~52% in FY18.
The company fully wrote-down the value (NZ$14.6m) of its investment in CA Plus in 1H19 (Concessionaire Analyser; an airport retail concession product) due to poor performance of the business since it was acquired in 2017.

Outlook
Management provided FY20 guidance last week: “Expect FY20 results broadly flat” as “UK market conditions remain unpredictable”.
Our view
GTK’s result presentation provides a welcome improvement in disclosure on its market opportunity though we are conscious that it hasn’t reiterated its +15% organic EBITDA growth objective over the longer term. While we continue to acknowledge the market opportunity exists and GTK’s business quality continues to improve, until we have more confidence in the medium term earnings trajectory, the share price appears stretched at 35x-40x one year forward PE.&nbsp;
Result summary (NZ$m)




&nbsp;


FY18


FY19


Change


Forsyth Barr


Guidance




Sales revenue


104.5


111.7


7%


110.0


~112




EBITDA


31.0


24.8


-20%


25.7


&lt;NZ$25m




R&amp;D amortisation


n/a


(0.9)


n/a


(1.2)





Acquisition related amortisation


n/a


(2.6)


n/a


(2.6)





EBIT


24.0


15.4


-36%


15.6





Reported NPAT


13.9


(3.3)


-124%


(4.3)





Underlying NPAT


14.0


10.9


-23%


10.3





Underlying EPS (cents)


16.2


11.0


-32%


10.5





Final DPS (cents)


8.7


3.0


-66%


4.0





Capitalised R&amp;D


3.7


5.1


37%


5.3





Source: GTK, Forsyth Barr analysis
Andy Bowley Head of Research Forsyth Barr Limited
T:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; +64 4 495 8246 M:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp;+64 21 338 941 TF:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; 0800 367 227 F:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; +64 4 495 8193 P:&nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; &nbsp; PO Box: 5266, Wellington 6145 W: &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; &nbsp;&nbsp; www.forsythbarr.co.nz Twitter:&nbsp; @forsythbarr

<h2>Gentrack</h2>
Yet Another Earnings Downgrade; Followed By Another
Gentrack has disappointingly lowered its FY19 EBITDA guidance yet again by saying that it will miss its previous guidance range of NZ$25m-NZ$26m (issued on 30 September, representing a ~-7% cut at the time). Our current forecast is NZ$25.7m. The downgrade is despite revenue of NZ$112m exceeding our, and consensus, forecasts.&nbsp;
Moreover, in light of continuing uncertainty in the UK market, GTK expects that its outlook for FY20 is broadly flat. This implies that the bad debt issue that has been a feature through FY19 may continue into FY20. The early FY20 guidance implies a c.-15% cut to our EBITDA forecast.&nbsp;
The company is releasing its FY19 result on Thursday 28 November, when we expect it to provide more detail surrounding the downgrade and implications for FY20.&nbsp;
We have a &nbsp;NEUTRAL rating on GTK. While we continue to like its longer term features (structural industry growth, improving business quality with greater SaaS exposure, management’s operational ability to win and retain customers, its competitive positioning and accretive M&amp;A potential), the short term will be impacted by (1) adverse investor sentiment given it is a persistent downgrade offender, and (2) the on-going uncertainty in its key UK business given Brexit and recent regulatory changes.
Andy Bowley&nbsp; Head of Research Forsyth Barr Limited
T: +64 4 495 8246 M: +64 21 338 941 TF: 0800 367 227 F: +64 4 495 8193 P: PO Box: 5266, Wellington 6145 W: <a href="https://foundry.smartkarma.com/www.forsythbarr.co.nz" target="_blank" rel="noopener">www.forsythbarr.co.nz</a> Twitter:@forsythbarr

Gentrack
Yet Another Earnings Downgrade; Followed By Another
Gentrack has disappointingly lowered its FY19 EBITDA guidance yet again by saying that it will miss its previous guidance range of NZ$25m-NZ$26m (issued on 30 September, representing a ~-7% cut at the time). Our current forecast is NZ$25.7m. The downgrade is despite revenue of NZ$112m exceeding our, and consensus, forecasts.&nbsp;
Moreover, in light of continuing uncertainty in the UK market, GTK expects that its outlook for FY20 is broadly flat. This implies that the bad debt issue that has been a feature through FY19 may continue into FY20. The early FY20 guidance implies a c.-15% cut to our EBITDA forecast.&nbsp;
The company is releasing its FY19 result on Thursday 28 November, when we expect it to provide more detail surrounding the downgrade and implications for FY20.&nbsp;
We have a &nbsp;NEUTRAL rating on GTK. While we continue to like its longer term features (structural industry growth, improving business quality with greater SaaS exposure, management’s operational ability to win and retain customers, its competitive positioning and accretive M&amp;A potential), the short term will be impacted by (1) adverse investor sentiment given it is a persistent downgrade offender, and (2) the on-going uncertainty in its key UK business given Brexit and recent regulatory changes.
Andy Bowley&nbsp; Head of Research Forsyth Barr Limited
T: +64 4 495 8246 M: +64 21 338 941 TF: 0800 367 227 F: +64 4 495 8193 P: PO Box: 5266, Wellington 6145 W: www.forsythbarr.co.nz Twitter:@forsythbarr

Gentrack: Yet Another Earnings Downgrade; Followed By Another

<h2>Gentrack</h2>
Further Offtrack
Gentrack (GTK) has downgraded forward earnings expectations for the fifth time in 12 months, this time citing bad and doubtful debts in the UK. The UK utilities market has experienced further deterioration with nine energy retailers failing over the past 12 months, including four GTK customers. While the outlook remains challenging in the UK, we are confident that GTK can revert to earnings growth in FY20 as a result of positive momentum in its airports and Australian utilities businesses, and the cycling of UK debt provisions. We retain a NEUTRAL rating reflective of the structural market opportunity which is appealing but mitigated by (1) negative underlying UK earnings risks, and (2) a demanding valuation at ~35x one year forward PE.
What’s changed?
<ul>
<li>Earnings: FY19 EBITDA downgraded -6% to NZ$25.7m</li>
<li>Target Price:&nbsp;Reduced to NZ$5.50 from NZ$5.75 to reflect a lower earnings outlook&nbsp;&nbsp;</li>
</ul>
Fifth cut to FY19 earnings in less than 12 months
GTK’s downgrade represents its fifth, either implicitly or directly, in the past 12 months. Our revised FY19 EBITDA estimate of NZ$25.7m is down -32% from our forecast prior to the FY18 result. While the latest downgrade reflects bad and doubtful debts, the recurring revenue generated by the four customers in administration amounted to ~NZ$1m. Therefore, there will also be an impact on revenue in future years.
UK utilities market restructuring
The UK energy regulator, Ofgem, introduced price caps for energy retailers in January 2019. Subsequently a number of retailers have gone into administration including GTK customers Solarplicity, Our Power, Eversmart, and One Select. GTK’s debt provisioning for further potential losses suggests management believes other customers may also fail. At the same time Brexit related uncertainty continues to hamper general IT investment decisions.
Longer term story to like, but patience necessary
We continue to like the longer term features of the GTK story; in particular it provides (1) a structural industry growth, (2) improving business quality with rising SaaS exposure, (3) management’s ability to win and retain customers, (4) its competitive positioning, and (5) accretive M&amp;A potential. However, trading risks create sufficient uncertainty over the shape of GTK’s near to medium term earnings growth profile and therefore investors may need to be patient in order to benefit from the structural growth opportunity that GTK offers.
<div class="content-highlight">
Investment View
GTK is a profitable niche software company with an attractive global growth opportunity driven by strong and sustainable secular trends. It provides specialist business critical software for utilities and airports, creating long term customer relationships. Increased investment in leadership, business development and technical expertise, together with potential M&amp;A, provide ample scope for growth. Our rating is NEUTRAL.&nbsp;
</div>
Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246

Gentrack
Further Offtrack
Gentrack (GTK) has downgraded forward earnings expectations for the fifth time in 12 months, this time citing bad and doubtful debts in the UK. The UK utilities market has experienced further deterioration with nine energy retailers failing over the past 12 months, including four GTK customers. While the outlook remains challenging in the UK, we are confident that GTK can revert to earnings growth in FY20 as a result of positive momentum in its airports and Australian utilities businesses, and the cycling of UK debt provisions. We retain a NEUTRAL rating reflective of the structural market opportunity which is appealing but mitigated by (1) negative underlying UK earnings risks, and (2) a demanding valuation at ~35x one year forward PE.
What’s changed?

Earnings: FY19 EBITDA downgraded -6% to NZ$25.7m
Target Price:&nbsp;Reduced to NZ$5.50 from NZ$5.75 to reflect a lower earnings outlook&nbsp;&nbsp;

Fifth cut to FY19 earnings in less than 12 months
GTK’s downgrade represents its fifth, either implicitly or directly, in the past 12 months. Our revised FY19 EBITDA estimate of NZ$25.7m is down -32% from our forecast prior to the FY18 result. While the latest downgrade reflects bad and doubtful debts, the recurring revenue generated by the four customers in administration amounted to ~NZ$1m. Therefore, there will also be an impact on revenue in future years.
UK utilities market restructuring
The UK energy regulator, Ofgem, introduced price caps for energy retailers in January 2019. Subsequently a number of retailers have gone into administration including GTK customers Solarplicity, Our Power, Eversmart, and One Select. GTK’s debt provisioning for further potential losses suggests management believes other customers may also fail. At the same time Brexit related uncertainty continues to hamper general IT investment decisions.
Longer term story to like, but patience necessary
We continue to like the longer term features of the GTK story; in particular it provides (1) a structural industry growth, (2) improving business quality with rising SaaS exposure, (3) management’s ability to win and retain customers, (4) its competitive positioning, and (5) accretive M&amp;A potential. However, trading risks create sufficient uncertainty over the shape of GTK’s near to medium term earnings growth profile and therefore investors may need to be patient in order to benefit from the structural growth opportunity that GTK offers.

Investment View
GTK is a profitable niche software company with an attractive global growth opportunity driven by strong and sustainable secular trends. It provides specialist business critical software for utilities and airports, creating long term customer relationships. Increased investment in leadership, business development and technical expertise, together with potential M&amp;A, provide ample scope for growth. Our rating is NEUTRAL.&nbsp;

Andy Bowley
andy.bowley@forsythbarr.co.nz
+64 4 495 8246

New Zealand

Gentrack Group Limited is a computer consulting company. The Company provides software solutions to energy & water utilities and airports.

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Gentrack (GTK NZ)

Gentrack: FY19 Result Initial Thoughts

Gentrack FY19 Result Initial Thoughts Gentrack’s (GTK) annus horribilis, which included multiple downgrades and an outlook substantially down on...

Forsyth Barr

Gentrack: Yet Another Earnings Downgrade; Followed By Another

Gentrack Yet Another Earnings Downgrade; Followed By Another Gentrack has disappointingly lowered its FY19 EBITDA guidance yet again by saying that...

Forsyth Barr

Gentrack: Further Offtrack

Gentrack Further Offtrack Gentrack (GTK) has downgraded forward earnings expectations for the fifth time in 12 months, this time citing bad and...

Forsyth Barr

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