Enterprise software businesses may seem boring to some, but the critical products and stable recurring revenue can be very valuable.
Chief Investment Officer, Steve Johnson, and Senior Analyst, Alex Shevelev, discuss the Forager Australian Fund’s investment in Gentrack (GTK), an enterprise software company providing billing software to utility companies and operations software for airports. The utilities sector in the UK has experienced upheaval in recent years while airports have suffered from COVID-induced travel bans. Find out why, despite the difficult environment, Steve and Alex feel Gentrack’s turnaround is showing some very promising progress.
Hi and welcome, it’s Steve Johnson here, Chief Investment Officer at Forager Funds. We’ve been talking a lot about enterprise software lately, and we’re going to be talking about it again today, but we’re digging into the specifics of one stock in particular, and I’m joined by Alex Shevelev to talk about it. The stock is Gentrack, ticker is GTK. Alex, tell us what it does first.
So Gentrack is a provider of billing software to utilities companies. So we’re talking about electricity or a water retailer for example, that needs to know exactly how much to bill its customers. So this seems like a boring bit of work, but it really needs to be done. It needs to be done very accurately. It needs to be a very scalable system. They do this work in Australia and New Zealand and in the UK, and they also have an airports business that operates globally as well. Now this is very sticky work. So it’s very difficult once a utility company has purchased this bit of software to rip it out of their processes, because it is really a key part of what is going on in that business.
I think importantly all of these businesses are generally quite integrated with the different parts of the business as well. You don’t just have a billing software system that you can pull out and plug a new one in. You need to do a whole heap of work to integrate that with your wider business.
I actually remember this IPO, the airports business was really being plugged as a growth part of the operation here. If I look at a share price chart, it got all the way up to $6 and we’re now back at $2 and six months ago we were $1.20 a share. What’s gone wrong?
So this was really a darling and it came out of the IPO. There was a really strong tailwind, especially from the UK business of selling predominantly to the challenger brands. Those are the ones that were taking share from the lazy incumbents predominantly they were growing the number of customers and because Gentrack was billing on a per customer basis, that was translating into very strong growth both from existing customers and then at the same time were also winning new customers. They came along and made a couple of acquisitions in the UK. Everyone got very excited about the business continuing to grow at very high rates. Then the UK government imposed caps on pricing in the UK and it was very detrimental to the challenger brands specifically because they were the less well-funded players.
Some of them actually went broke and had to be transitioned to other suppliers. And as well just generally across the whole sector, you had much less spending on software than you would have otherwise had in a market that was much better funded.
So looking at this morning’s presentation, maybe still a few more of its customers to go broke from some of the language that’s happening there. It’s quite clearly a turnaround. We’ve had a lot of success with these types of businesses in particular, in the turnaround space. Where is this one on the turnaround journey?
So let’s look at the setup of what this is in terms of a turnaround. So we’ve got a business with quite sticky revenue. We’ve got a net cash balance sheet. That was our starting point. We’ve got a new management team and a new board, five of the six members of the board have less than two years of service with the company. The new management team came on at the end of last year. So today we actually saw a strategy day of presentations from the CEO, the CFO and a lot of the managers one level down, which was really good to see. A lot of focus was on the technology on the delivery, the company is spending money to catch up in some of the technology aspects that they have missed out on as well. Then we can look at a couple of markers to see how they are turning the business around. So we had a half year period to March. There was a solid half year period for cash generation and for profitability.
With the strategy day today, we were given some interesting targets for FY24 that aligned quite closely with the numbers that we had envisaged. That involves revenue growth between FY21 and FY24 on the recurring side of more than 10% a year, which is quite significant especially considering FY22 is still going to be a reasonably difficult year.
We were also shown a translation to cash margins, which is very important in this case, of closer to industry norms. Not quite there yet, but quite close. And it seems over the last six to nine months, the management team here has proven to be quite conservative. They’ve stopped capitalizing to a large extent. They’ve expensed more, they’ve been quite conservative about how they’ve guided up until today. So there’s a reasonably good chance that they have quite high confidence in those FY24 numbers.
Pretty standard turnaround behaviour from management really. You get the kitchen sinking of the operations and you get the bar set low in terms of what they want to jump over.
What we want to see here is them jumping well and truly over that over the coming years. Still a very undemanding share price for Gentrack. It’s one that is not particularly liquid and doesn’t trade a lot on the stock market, but one with a good runway ahead of it yet. Thanks for tuning in.