Roy Davidson, 14 December 2017

Gentrack stock comment 

Gentrack designs, develops, implements and supports specialist software for electricity, gas and water utilities. The company also provides operational software solutions for airports. GTK’s core software offering in the utilities space is designed to support the customer management, billing and collections processes. In the airport space, the company’s products provide real-time information flows and resources for a number of stakeholders, allowing for efficiency improvements.

GTK has four key revenue streams; 1) licence revenue which the company receives for the initial sale of its software licences, 2) annual fees that GTK charges for the use and support of its software, 3) project revenues are derived from the work the company does around software implementation for new customers and upgrades for existing customers, and 4) support services revenue, the largest portion of GTK’s revenues.

For the airport business, the company provides software to all four of the airports in New Zealand with more than 1 million passengers annually. In Australia, GTK has its software installed at nine of the 14 sites which it sees as addressable. As with the airports business, GTK has a dominant position in the New Zealand market with its utility offering. With many of the major retailers (and networks) as customers, the company holds around 70% of market share by customers. Further abroad, market share is much smaller, providing plenty of headroom to grow its presence.

GTK’s dominance of the New Zealand utilities market has been the result of deregulation and the introduction of retail competition. In this competitive environment, where customers have the ability to choose their providers, there is an increasing expectation from customers to be able to receive a higher quality offering, better customer engagement, more flexibility in the type of service they receive and a better customer experience overall. With customer retention becoming a key focus for many utilities, more advanced software systems are required to better accommodate the various needs of different customer segments.

GTK has a comprehensive list of clients in the utilities and airport space. The company’s airport information management software has added a degree of diversification to group revenues (15% of revenues). The modularised software offering provides customers with the opportunity to implement additional software as required, adding an element of up-sell capability to the business model. With leading positions in Australasia for both airports and utilities, further growth will be driven by international markets, initially the UK. With a proven track record, relatively stable earnings, and leverage to growth opportunities as consumer and regulatory dynamics shift, we believe GTK is well placed to deliver stable growth with an attractive dividend yield.

Risks to GTK include: 1) Product risk, 2) regulatory change, 3) increased competition.