Switzer Super Report | Professional’s Pick: Gentrack Group (GTK)
By Robert Miller | Portfolio Manager at NAOS Asset Management
What is the stock?
Gentrack Group Ltd (ASX:GTK, NZX:GTK), a software provider for both utility retailers and airports.
How long have you held the stock?
Since early 2016, it listed on the ASX in mid-2014.
What do you like about it?
Four main factors:
The mission critical nature of the software. Companies rely on Gentrack software for such things as billing as well as customer & revenue management.
The stickiness of the customer base. It becomes very expensive and time consuming to replace. The longer it’s embedded, the harder it becomes to replace.
High barriers to entry to develop such software applications.
Annuity style revenue generation with very strong cash flow generation.
How is it better than its competitors?
The company was established 20 years ago when the software was originally developed in New Zealand.
Gentrack is unique vs the likes of Oracle/SAP because they install and support their own software systems rather than handing it off to an Accenture. This means they have much shorter install times, it’s a significantly cheaper solution. They have made select acquisitions lately, which bolster their software capabilities in both the airports and utilities divisions, which see them now offer a better solution to a larger spread of potential future customers.
In the larger utilities division, they are the market leader in New Zealand and are growing in Australia and the UK. Since 2007, they are yet to lose a customer to a competitor and they have a 100% win rate from companies operating in the deregulated UK water market over the past couple of years.
What do you like about its management?
The CEO is ex-SAP and the Chairman was instrumental in the 2007 management buyout and still remains the largest shareholder. In our opinion, management is high quality and inherently conservative. None of the software spend is capitalised, which we view as an endorsement for great management.
In recent times, they have made high quality earnings accretive and value accretive acquisitions and have brought on a key strategic investor. We feel they are good custodians of shareholders’ capital.
What is your target price?
At what point would you sell it?
Either around our valuation or if there was a significant deviation from the initial investment thesis.
How much has it added (subtracted) to your overall portfolio over the last 12 months?
It was a top performer during FY17 for our Mid-Cap Listed Investment Company (LIC), NAOS Absolute Opportunities Company (ASX: NAC).
Where do you see value?
The quality of the underlying software is where we see value and this will drive future growth. Strong industry tailwinds exist through a global trend around the deregulation of water and energy markets, in addition to this, as airports shift to private equity ownership more emphasis is placed on profitability. These are long term factors underpinning the industry and Gentrack has a superior, cost-effective offering with a highly scaleable business model.
Gentrack is a high (and improving) margin business with a sound balance sheet. If further revenue growth is achieved we believe it should lead to significant dividends for investors over the medium term.
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