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).

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New Zealand Professional Investment Services Firm, Forsyth Barr

Equity Bottom-Up

<h2>Gentrack</h2>
Getting a Feel for the Floor
Gentrack (GTK) has substantially cut its EBITDA guidance following last week’s warning that it faced challenging market conditions and that a key UK utilities customer had suspended deployment of a major contract. Consequently, there is a reasonable chance it generates a post-tax underlying loss in FY20. Drastic times call for drastic measures, and contra to its growth ambitions, the company is now undertaking a cost-out programme. While the company’s earnings may now have found their floor, its medium term growth profile may be at least partly compromised by the scars of the headcount reduction. With no certainty on market conditions improving near-term (our forecasts imply modest upside next year), and with GTK trading on a still elevated FY21 PE of ~31x on our revised estimates, we retain an UNDERPERFORM rating.
What’s changed?
<ul>
<li>Earnings: Substantial cuts made; consistent with new guidance</li>
<li>Target Price: Reduced from NZ$4.20 to NZ$2.40</li>
<li>Rating: UNDERPERFORM retained</li>
</ul>
Earnings flattened
GTK’s updated FY20 EBITDA guidance implies a fall of -52% to -68% from an already depressed FY19 level. While the earnings run-rate at year end should be modestly better than now, given an ~NZ$8m cost-out programme, the new guidance implies a substantially lower base for margins. This tells us that despite cost cutting (which will have business mind-set implications) GTK remains invested for growth (i.e. opex heavy).
SaaS growth has softened; margin questions remain
We expect FY20 revenue to be -11% lower than FY19, reflective of a significant decline in non-recurring project services (we estimate recurring revenue will be up to ~78% of total from ~70% in FY19). Ironically, business quality is improving. Management suggests that contractually recurring revenue will grow by just +5% in FY20. This is good news in that its core SaaS (software-as-a-service) business continues to grow; however, the rate of growth is significantly lower than that achieved in recent years (in part given the absence of acquisitions) and the apparent margins being delivered are materially lower than industry averages.
Valuation crushed
With NPAT close to break-even in FY20, we amend our approach to valuing GTK. We continue to use a DCF, however, our multiple based approach is now focussed on revenue, EBITDA and EBIT. We cut our target price aggressively from NZ$4.20 to NZ$2.40, yet our new target remains predicated on a meaningful earnings recovery and SaaS peer-type forward valuation multiples.&nbsp;
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Investment View
GTK is a profitable niche software company, providing specialist business critical software for utilities and airports, with an attractive longer term global growth opportunity driven by sustainable secular trends. It has been migrating to an SaaS model in recent years. At the same time, margins have declined and revenue impacted. The earnings downgrade cycle of the past two years has been very severe. Our rating is UNDERPERFORM.&nbsp;
</div>
Andy Bowley andy.bowley@forsythbarr.co.nz +64 4 495 8246

Gentrack
Getting a Feel for the Floor
Gentrack (GTK) has substantially cut its EBITDA guidance following last week’s warning that it faced challenging market conditions and that a key UK utilities customer had suspended deployment of a major contract. Consequently, there is a reasonable chance it generates a post-tax underlying loss in FY20. Drastic times call for drastic measures, and contra to its growth ambitions, the company is now undertaking a cost-out programme. While the company’s earnings may now have found their floor, its medium term growth profile may be at least partly compromised by the scars of the headcount reduction. With no certainty on market conditions improving near-term (our forecasts imply modest upside next year), and with GTK trading on a still elevated FY21 PE of ~31x on our revised estimates, we retain an UNDERPERFORM rating.
What’s changed?

Earnings: Substantial cuts made; consistent with new guidance
Target Price: Reduced from NZ$4.20 to NZ$2.40
Rating: UNDERPERFORM retained

Earnings flattened
GTK’s updated FY20 EBITDA guidance implies a fall of -52% to -68% from an already depressed FY19 level. While the earnings run-rate at year end should be modestly better than now, given an ~NZ$8m cost-out programme, the new guidance implies a substantially lower base for margins. This tells us that despite cost cutting (which will have business mind-set implications) GTK remains invested for growth (i.e. opex heavy).
SaaS growth has softened; margin questions remain
We expect FY20 revenue to be -11% lower than FY19, reflective of a significant decline in non-recurring project services (we estimate recurring revenue will be up to ~78% of total from ~70% in FY19). Ironically, business quality is improving. Management suggests that contractually recurring revenue will grow by just +5% in FY20. This is good news in that its core SaaS (software-as-a-service) business continues to grow; however, the rate of growth is significantly lower than that achieved in recent years (in part given the absence of acquisitions) and the apparent margins being delivered are materially lower than industry averages.
Valuation crushed
With NPAT close to break-even in FY20, we amend our approach to valuing GTK. We continue to use a DCF, however, our multiple based approach is now focussed on revenue, EBITDA and EBIT. We cut our target price aggressively from NZ$4.20 to NZ$2.40, yet our new target remains predicated on a meaningful earnings recovery and SaaS peer-type forward valuation multiples.&nbsp;

Investment View
GTK is a profitable niche software company, providing specialist business critical software for utilities and airports, with an attractive longer term global growth opportunity driven by sustainable secular trends. It has been migrating to an SaaS model in recent years. At the same time, margins have declined and revenue impacted. The earnings downgrade cycle of the past two years has been very severe. Our rating is UNDERPERFORM.&nbsp;

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

Gentrack

Gentrack: Getting a Feel for the Floor