Utilities Modernization And Recurring Revenue Will Drive Measured Earnings Expansion Over Time

Catalysts

About Gentrack Group

Gentrack Group provides mission critical software and services to utilities and airports to support billing, customer experience and operational transformation.

What are the underlying business or industry changes driving this perspective?

• Although utilities globally are accelerating modernization of billing and customer platforms to handle distributed energy and complex tariffs, elongated procurement cycles and mid to late year contracting windows may delay project revenue recognition and push stronger growth into later periods, which could temper near term revenue and EBITDA expansion.
• Despite strong referenceability from early g2.0 go lives and a growing base of recurring software and support fees, the need for ongoing heavy product investment to keep pace with rapidly evolving energy flexibility, storage and EV use cases could cap near term operating leverage and slow margin expansion.
• While the transition of utilities from on premises, bespoke systems to cloud based, multi region platforms underpins a sizeable new customer pipeline, higher implementation complexity in large multi country and multi meter point deals raises execution risk that could impact project profitability and net margins if timelines slip.
• Although airports and air traffic management operators are investing in data driven platforms to improve capacity and passenger flows, Veovo’s reliance on a concentrated set of large, multi year contracts and lumpy hardware components exposes group revenues and earnings to timing volatility if upgrades or awards are deferred.
• Despite the company’s ambition to leverage partners and CRM ecosystems across EMEA and APAC, successful scaling into more than 40 countries requires sustained hiring, integration and go to market spending that may outpace revenue in some periods and moderate EPS growth while the footprint is built out.

Assumptions

This narrative explores a more pessimistic perspective on Gentrack Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming Gentrack Group's revenue will grow by 9.1% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 9.1% today to 11.8% in 3 years time.
• The bearish analysts expect earnings to reach NZ$35.4 million (and earnings per share of NZ$0.36) by about December 2028, up from NZ$20.9 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as NZ$72.8 million.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 34.4x on those 2028 earnings, down from 49.7x today. This future PE is greater than the current PE for the AU Software industry at 25.9x.
• The bearish analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.51%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• The company has delivered a 22% compound annual growth rate in revenue and 21% in EBITDA over the last 5 years, and management is targeting more than 15% midterm revenue growth. If this growth trajectory is sustained or accelerates, stronger than expected revenue and EBITDA expansion could drive a higher share price.
• A deep utilities pipeline that includes being preferred vendor or shortlisted on 10 new customer opportunities representing around 30 million meter points, and management confidence that contracting only 3 to 4 of these could support strong growth in FY27, creates upside risk to recurring revenue, project revenue and earnings.
• Veovo is delivering underlying growth of about 30% once lumpy hardware is excluded, with recurring revenue up 18% and visibility to match at least 15% growth again. Continued outperformance in this segment and possible bolt on acquisitions could lift group revenue growth and operating margins above expectations.
• Group recurring revenue is already growing faster than total revenue at 13%, and utilities product and sales investment is intended to convert more of the maturing pipeline into long term software and support contracts. A successful shift toward higher quality recurring revenue could structurally improve net margins and earnings.
• A strong balance sheet with almost $85 million of net cash, no external debt and high cash conversion provides capacity to fund product development and value accretive mergers and acquisitions without dilution. If management deploys this capital effectively it could enhance earnings growth and valuation multiples.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for Gentrack Group is NZ$8.85, which represents up to two standard deviations below the consensus price target of NZ$11.13. This valuation is based on what can be assumed as the expectations of Gentrack Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of NZ$14.5, and the most bearish reporting a price target of just NZ$8.85.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be NZ$299.2 million, earnings will come to NZ$35.4 million, and it would be trading on a PE ratio of 34.4x, assuming you use a discount rate of 8.5%.
  
• Given the current share price of NZ$9.58, the analyst price target of NZ$8.85 is 8.2% lower. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.