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>
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

Gentrack

Gentrack: Further Offtrack