New Zealand Professional Investment Services Firm

Forsyth Barr

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.

New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Gentrack</h2>
<p><strong>1H20&nbsp;—&nbsp;Tracking the Recovery</strong></p>
<p><strong>OUTPERFORM</strong></p>
<p>Gentrack's&nbsp;(GTK) 1H20 result was severely impacted by adverse market conditions, an increase in headcount (which has now been reversed) and increasing R&amp;D&nbsp;investment. EBITDA was down -78% on a like for like basis. Despite successive downgrades, we expect 1H20 will mark the low point of&nbsp;GTK's&nbsp;earnings demise, in light of (1) steps taken to right size and reposition the cost base, and (2) the transition to higher quality, lower volatility and more sustainable recurring revenue. It has lost more customers than gained over the past 12 months (attrition is largely a function of business failures and acquisitions) and competitive pressures have increased, yet its customer base remains sticky, and it has increased R&amp;D investment to retain a competitive advantage. The scope for earnings recovery is strong. Valuation is undemanding on historic profit levels though investors need to be aware of recovery risks. OUTPERFORM.&nbsp;</p>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/137/606/original/image_66353134621591057685089.png?1591057687" class="editor-image img-responsive" data-smartkarma-image-id="137606"></figure>
<p><strong>What's changed?&nbsp;</strong></p>
<div id="m_-1018274028836661216if97s2-2-2-2-2">
<ul>
<li><strong>Earnings</strong>:&nbsp;FY20 largely unchanged pre-IFRS 16, FY21 lower given R&amp;D investment, longer term&nbsp;profitably&nbsp;largely unchanged</li>
</ul>
</div>
<p><strong>Transition to&nbsp;SaaS&nbsp;continues</strong></p>
<div id="m_-1018274028836661216iau26-2-2-2-2">
<p>Revenue declined -7% against the prior year yet its quality continues to improve. Committed recurring revenue&nbsp;(CRR) is up to ~59% of total revenue as&nbsp;GTK's&nbsp;transition to&nbsp;SaaS&nbsp;(software-as-a-service) continues. With three new UK utility and two new airport&nbsp;customers gained in the period, we expect further&nbsp;SaaS&nbsp;progress through 2H20. Economies of scale benefits (greater proportion of cost base fixed) with favourable incremental margins, given a lower customer integration cost/revenue model&nbsp;under&nbsp;SaaS&nbsp;compared to on-premise enterprise software, should&nbsp;assist the earnings recovery over the medium term.&nbsp;</p>
<div></div>
</div>
<p><strong>Competitive environment leads to increased product investment&nbsp;</strong></p>
<div id="m_-1018274028836661216i6y3z-2-2-2-2">
<p>GTK's R&amp;D investment is increasing given its desire to ensure a competitive edge in light of increasing competitive pressures and in particular advances made by Octopus Energy's Kraken platform. More R&amp;D is now being expensed rather than capitalised, which is softening the medium term earnings recovery. However, we expect this additional investment to support GTK's customer retention efforts and ensure it remains competitive and able to attract new customers.&nbsp;</p>
</div>
<p><strong>1H20 trough</strong></p>
<div id="m_-1018274028836661216ixznh-2-2-2-2">
<p>Management is no longer publishing numerical guidance but says that it expects 2H20 EBITDA will be in excess of the NZ$4.3m generated in 1H20. Annualised labour cost benefits of NZ$6.5m–NZ$7.0m (commenced in March 2020), are supportive but new senior hires and COVID-19/economic revenue risks will partially offset. We leave our target price unchanged at NZ$2.20.&nbsp;</p>
</div>
<div>
<div>
<div><strong>Andy Bowley</strong></div>
<div><a href="mailto:andy.bowley@forsythbarr.co.nz" target="_blank" rel="noopener">andy.bowley@forsythbarr.co.nz</a></div>
<div>+64 4 495 8246</div>
<div></div>
</div>
</div>
<div>
<div>
<div><strong>Scott Anderson</strong></div>
<div><a href="mailto:scott.anderson@forsythbarr.co.nz" target="_blank" rel="noopener">scott.anderson@forsythbarr.co.<wbr>nz</a></div>
<div>+64 4 914 2219</div>
</div>
</div>

Gentrack
1H20&nbsp;—&nbsp;Tracking the Recovery
OUTPERFORM
Gentrack's&nbsp;(GTK) 1H20 result was severely impacted by adverse market conditions, an increase in headcount (which has now been reversed) and increasing R&amp;D&nbsp;investment. EBITDA was down -78% on a like for like basis. Despite successive downgrades, we expect 1H20 will mark the low point of&nbsp;GTK's&nbsp;earnings demise, in light of (1) steps taken to right size and reposition the cost base, and (2) the transition to higher quality, lower volatility and more sustainable recurring revenue. It has lost more customers than gained over the past 12 months (attrition is largely a function of business failures and acquisitions) and competitive pressures have increased, yet its customer base remains sticky, and it has increased R&amp;D investment to retain a competitive advantage. The scope for earnings recovery is strong. Valuation is undemanding on historic profit levels though investors need to be aware of recovery risks. OUTPERFORM.&nbsp;

What's changed?&nbsp;


Earnings:&nbsp;FY20 largely unchanged pre-IFRS 16, FY21 lower given R&amp;D investment, longer term&nbsp;profitably&nbsp;largely unchanged


Transition to&nbsp;SaaS&nbsp;continues

Revenue declined -7% against the prior year yet its quality continues to improve. Committed recurring revenue&nbsp;(CRR) is up to ~59% of total revenue as&nbsp;GTK's&nbsp;transition to&nbsp;SaaS&nbsp;(software-as-a-service) continues. With three new UK utility and two new airport&nbsp;customers gained in the period, we expect further&nbsp;SaaS&nbsp;progress through 2H20. Economies of scale benefits (greater proportion of cost base fixed) with favourable incremental margins, given a lower customer integration cost/revenue model&nbsp;under&nbsp;SaaS&nbsp;compared to on-premise enterprise software, should&nbsp;assist the earnings recovery over the medium term.&nbsp;


Competitive environment leads to increased product investment&nbsp;

GTK's R&amp;D investment is increasing given its desire to ensure a competitive edge in light of increasing competitive pressures and in particular advances made by Octopus Energy's Kraken platform. More R&amp;D is now being expensed rather than capitalised, which is softening the medium term earnings recovery. However, we expect this additional investment to support GTK's customer retention efforts and ensure it remains competitive and able to attract new customers.&nbsp;

1H20 trough

Management is no longer publishing numerical guidance but says that it expects 2H20 EBITDA will be in excess of the NZ$4.3m generated in 1H20. Annualised labour cost benefits of NZ$6.5m–NZ$7.0m (commenced in March 2020), are supportive but new senior hires and COVID-19/economic revenue risks will partially offset. We leave our target price unchanged at NZ$2.20.&nbsp;



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





Scott Anderson
scott.anderson@forsythbarr.co.nz
+64 4 914 2219



Gentrack

Gentrack: 1H20 — Tracking the Recovery