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Monthly Report Australian Shares Fund May 2021

31/05/2021

Australian Fund May Monthly Report

During the month the Fund’s net asset value rose 0.3% while the All Ordinaries Accumulation Index rose 2%. It was a quiet month for the Fund’s investments, with a few bright spots offset by some poor performers.

There are few things more exciting for the Forager team than finding a high quality business, ignored by the broader market, in the process of being turned around by a well-credentialled management team. It’s been a long wait, but Gentrack (GTK) has started to deliver on our expectations.

The company writes software to perform some critical, largely unexciting tasks for utility companies across Australia, New Zealand and the UK. Billing millions of customers the right amount for their electricity is not an easy task. Gentrack’s software makes it easier. All at a cost substantially below what a customer would have to pay the likes of an SAP (XETRA:SAP) or Oracle (NYSE:ORCL).

A smaller business unit provides airport operating systems, displaying flight times and billing airlines. Revenue from both segments is highly recurring, with a customer unlikely to move software providers unless something goes seriously wrong.

First listed in 2014, this Kiwi business quickly became an investor favourite, trading at nosebleed valuations. The business grew by acquiring Jupiter and Evolve, providers of new-age software to challenger electricity brands in the UK. With challengers quickly displacing stale incumbents in the UK, and Gentrack billing per customer, growth was set to continue uninterrupted for years.

Not so fast.

In 2019 the UK energy market entered a tail spin. Government regulation introduced price caps. Some challenger energy companies went broke and the whole sector stopped investing in software.

Gentrack’s stock price fell from more than $6 per share in mid-2019 to $2 per share pre-COVID and $0.77 per share in the depths of the March 2020 panic.

The recovery started with a board cleanout and the appointment of a new management team. The new team, headed by Gary Miles, comes with relevant software and turnaround experience. Five of the six board members have less than two years tenure. The sixth represents a well incentivised shareholder: a private equity firm which purchased shares after the IPO and is sitting on a significant loss.

Gentrack’s half-year result, delivered in late May, showed promise. Despite continued upheaval, the contracted recurring revenue in both business units grew from the prior pre-COVID period.

For the first time in a long time, the company is talking about winning new customers. And cash levels have climbed to a very comfortable NZ$22m.

The company has guided to revenue growth in the current year finishing in September, better than its earlier expectations. Management is increasing software spend by an annualised $12m, hitting profitability in the coming 18 months. But armed with more competitive products and a growing revenue base the utilities business will be well placed heading into 2023.

The airports segment is already growing contracted recurring revenue. And, with global air travel returning to some semblance of normality by 2023, Gentrack will begin to see more new project revenues too.

A strategy day in mid-June should provide more clarity on management’s plans. If the team can grow revenue while moving towards industry standard margins, Gentrack may well see itself become an investor favourite once again.

Mainstream saga continues

Last month’s report detailed the ongoing auction process for fund administration provider Mainstream (MAI). And May showed no sign that either of the two bidders, SS&C (NASDAQ:SSNC) and Apex Group, were flinching.

The highly recurring and strategic nature of the revenues at Mainstream have been building for years. But its importance has only been recognised as these two behemoths go head to head to win control of the business.

The current highest bid, which may be out of date by the time you read this, is $2.76 per share by SS&C. This marks the 14th bid since the auction began in March. This has already been a stellar outcome for the Forager Australian Shares Fund, Mainstream’s largest institutional shareholder. If the bidding continues, it will only get better.

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