Cheap enterprise utility and airport software - positioning for renewables

Utility billing and airport enterprise software company Gentrack (GTK) generated $105 million NZD revenue in its 2021 FY (ending 30 Sep) against $100.5 million in 2020.  The company generated $12 million EBITDA in 2021 vs $12.1 million in 2020.  

The company is consciously investing into innovation so to grow revenues and to hold/grow EBITDA in 2021 is a pretty credible achievement. Expect more investment in 2022 and some downward pressure on profitability.  The growth strategy built on investing into innovation around decentralised power generation, renewables and lowering the cost to serve sounds credible.  GTK are are expanding into demand forecasting, more data analysis, comprehensive energy meter integration, introducing cost per user mentality, digitalisation.  This all makes sense.

Gartner categorise this class of software as utility customer information systems (CIS), with the likes of SAP and Oracle very strong in this space.

Gartner describe the CIS software market as commercial off-the-shelf (COTS) software packages that address business-critical utility meter-to-cash (M2C) and customer service business processes. M2C functions covered include: account maintenance, order processing, product/service management, rate design, billing, credit collection, accounts receivable, statement preparation, and payment processing. For customer service, CISs support multiple client interaction channels — such as call centers, interactive voice response/voice response units. They also support various digital engagement channels (social media and, more recently, virtual assistants/chatbots) — as well as customer self-service needs.

GTK have opened a lower cost indian software development hub (100 employees), while placing a higher reliance on managed services.      

Gentrack are guiding to grow revenues in 2022 and while the full year run-rate in incremental innovation spend will expand in 2022, the business is not in bad shape at all.   Worries around UK energy retailers going to the wall and Octopus Energy dominating this market have been overplayed in the weak Gentrack share price.

The investment case is simple.  The company has circa 100M shares on issue, so at $1.20 NZD it is capitalised at $120 million NZD.  Accounting policies are conservative, their technology relevant and spread between on-premise and cloud.   

The company had $16.5 net cash at 31 March 2022,  suggests the company is trading at an enterprise value  of $105 million.   This means the company trades at an forecasted 2022 EV/Sales multiple of less than 1 times.

Another way of thinking about Gentrack is that they will generate EBITDA margins of 11.4% in 2021 which is a far cry from the 30% margins the company was able to generate at its peak.  The company may have been overearning historically but 20% is pretty credible target for enterprise software.

I wouldn't expect the company to generate the 20% in 2023 FY but in time, if we can take the $105 million revenues, to say $115 million in 2022, $125 million in 2023 and $140 million in 2024, you can see the company on medium term plan to making $28 million cash EBITDA.

Successful execution could see this $28 million 2024 EBITDA be valued at 15-20X EV/EBITDA , which implies a $5 fair value.   In terms of downside, yes poor execution will be punished but you don't see enterprise software trade below EV/Sales  of 1X too often and its likely someone will acquire Gentrack and milk its $80 million in recurring revenues.

The risks relate to the health of energy retailors particularly those without their own generation.  One of GTK's largest customer Bulb is in administration under the ownership of the UK government.  The real risk is this customer base is reallocated to UK market participants with the likes of Octopus Energy buying the business and substitute the Gentrack technology stack for their own.

Disclosure - I own shares here.

Peers 

• AgilityCIS (PE owned out of NZ/Aus, Silver Tree, Pioneer Capital) merged with Tally Group
• Cerillion Plc (CER) trades at 7.1X EV/ 2022 Sales, 28.6X EV/EBIT for the 2022 Sep Year with CIS software that is overweight telco customers.
• Constellation software (CSU) - Trades at 30X 2022 Dec Year PER, 5.1X EV/ 2022 Sales.  Constellation Software has acquired many small peers.
• Volue ASA - Trades at 49X 2022 Dec Year earning, 12.6 EV/EBITDA, 3.4X EV/2021 Sales 
• Asseco - conglomerate Polish software business model model trades on 8.8X EV/EBIT for 2021, 0.9X EV/Sales
• Hansen (HSN) Trades on 20.4X PER, 10.5X EV/EBITDA, and 3.4X sales,