Gentrack Group Ltd: Is it Hansen Technologies Limited’s next acquisition target?

Strategic acquisitions are a core growth strategy for billing software company Hansen Technologies Limited (ASX: HSN). Earlier this year the company added U.S.-based utility billing company PPL Solutions to its portfolio and has committed to continue the hunt going forward.

Specifically, Hansen is looking for ‘strategically attractive business[es] strongly aligned with Hansen’s key acquisition criteria’.

New Zealand-based Gentrack Group Ltd (ASX: GTK) is significantly involved in billing software and about one-third the size of Hansen. Could Hansen be thinking of adding Gentrack to the shopping cart?

Well, let’s run it through Hansen’s stated acquisition criteria:

1. Alignment with Hanson’s core billing & customer care business


Gentrack has some clear similarities to PPL Solutions and Hansen’s own core business; a Software-as-a-Service company providing billing software for electricity, gas and water utilities. Around 84% of Gentrack’s revenue came from these sources in the first half of financial year 2016.

2. Owns the intellectual property in its billing software


Gentrack’s billing products are developed internally, so it owns the intellectual property as a result. In addition, the company’s 2014 prospectus notes: “Gentrack typically retains the ownership of any intellectual property shared with customers or developed as part of specific project work or ongoing support.

3. Has recurring revenue streams


Gentrack reported 30% of revenues came from recurring fees in the first half of 2016, but considers 50-60% of revenue in any given year is likely to reoccur in the following year according to its prospectus.

4. Extends Hansen’s footprint into a new market segment


Hansen already has utilities billing in its portfolio from the PPL Solutions acquisition, but Gentrack would expand this reach while also adding Airport billing to the portfolio.

Looks like a match! But what about price?

Hansen paid about 4x EBITDA for PPL Solutions, a bargain price, but reportedly in the knowledge that PPL Solutions operates at lower margins than Hansen traditionally achieves.

Hansen itself recently reported a 30.5% EBITDA margin and the company currently sells for 18x EBITDA. Gentrack operates at a very similar 30% EBITDA margin.

If Hansen considered its own share price a reasonable measure of comparative value, an 18x EBITDA multiple as a starting price for Gentrack would value the company at around $3.69 per share, a 22% premium above the share price at the time of writing. It is likely though that Gentrack investors (including myself) would demand a higher premium to be enticed to sell.

Hansen Technologies clearly has both the incentive and experience to acquire a company like Gentrack, but given Gentrack’s size and likely need to issue equity to fund the purchase, any firm action could be some time away.

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Motley Fool contributor Regan Pearson owns shares of GENTRACK FPO NZ. The Motley Fool Australia owns shares of Hansen Technologies. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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