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Gentrack Group Ltd shares slump on flat guidance

Shares in software-as-a-service business Gentrack Group Ltd (ASX: GTK) dropped 5% today after the group reported its interim results for the six-months ending March 31 2018 (H1 2018). Below is a a summary of the results, with comparisons to relevant prior corresponding periods (all figures in NZ dollars).

  • Net profit of $8.4 million, up 34% on H2 2017
  • Revenue of $52 million, up 12% on H2 2017
  • EBITDA of $15.9 million, up 6% on H2 2017
  • Recurring revenues up 89% on H1 2017 (thanks mainly to acquisitions)
  • Interim dividend of 5 cents per share
  • Net debt of $37.5 million
  • Forecast for flat EBITDA in H2 2018
  • Long-term forecast for 15% compound annual growth rate in EBITDA intact

Gentrack provides billing software to large utility companies and airports around the world.

It delivered a good operational result for a small-cap that boasts attractive economics (largely via its SaaS business model & recurring revenues), a decent growth track record, and a product suite that appears reasonably sticky with its customers.

The half-on-half growth is the best measure of how the business is performing as it is effectively from continuing operations, with revenue and profit growth of 12% and 34% (respectively) impressive given the short time period.

The share price is likely falling today for two reasons. The primary reason being the disappointing headline guidance for flat EBITDA growth in the second half of Gentrack’s financial year 2018. This is an issue as the company is highly valued by investors expecting it to deliver double-digit growth rates into the future. In other words the valuation is retreating on assumptions of lower short-terms growth rates.

The company’s market value around $580 million is 34x annualised NZD net profit, which gives a rough guide as to how the market is expecting great things from the business.

As such it’s fair to say the ASX-listed scrip selling for A$6.50 is fairly expensive, although Gentrack still looks a good quality small-cap that could deliver some strong capital growth to today’s investors.

Despite today’s share price falls the stock is up nearly 50% over the past year. It comes with substantial risks though around its reliance on important clients and competitors potentially taking market share from it.

Larger peers in the SaaS space to have found their mojo recently include Altium Limited (ASX: ALU) and Hansen Technologies Limited (ASX: HSN). All of these businesses boast strong outlooks, but if they’re a little high risk for you why not discover The Motley Fool’s Top 3 ASX Blue Chips To Buy In 2018

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Motley Fool contributor Tom Richardson owns shares of Altium and GENTRACK FPO NZ.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares of Altium and Hansen Technologies. The Motley Fool Australia has recommended GENTRACK FPO NZ. 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 Scott Phillips.

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