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Is the Gentrack Group Ltd (ASX:GTK) share price attractive with its latest £20 million buy?

The Gentrack Group Ltd (ASX: GTK) share price could be a large mover today after the utility software company announced its latest acquisition that it’s making for £20 million (NZ$44.2 million).

Gentrack is acquiring Evolve Parent Limited and Evolve Analytics Limited, a market-leading provider of energy data analysis software and services provider in the UK, for an enterprise value of £20 million.

According to Gentrack, Evolve specialises in the identification and correction of settlement and billing errors as well as the accuracy of standing data. Its customer base already includes three of the big six energy suppliers in the UK. Evolve captures data at over 17 million meter points.

Evolve is a software as a service (SaaS) business, according to estimates 58% of its FY19 revenue is recurring and margins are in excess of 50%.

Gentrack management said that this acquisition strengthens the company’s position as an industry leader in the UK for utility billing with complementary software servicecs.

Ian Black, the CEO of Gentrack, said “Following the acquisition, Gentrack will have 53 utilities customers in the UK with an increased exposure to the “Big 6” energy suppliers. We expect the Evolve solutions will be highly valuable to our existing UK customer base and there is an opportunity to extend this offering to the ANZ markets.”

Gentrack will fund this acquisition with extended debt facilities. In the year to 30 April 2019 Evolve is forecast to achieve revenue of £3 million and £1.8 million of earnings before interest, tax, depreciation and amortisation (EBITDA). This represents an EBITDA multiple of 12.8 times, which seems quite high – management must be confident of various synergy benefits.

Management believe the acquisition will be low single digit earnings per share (EPS) accretive in the first full year, being FY19.

Although the acquisition will be funded by debt, Gentrack intends to carry out a fully underwritten pro-rata renounceable offer to reduce its debt and provide flexibility to support future acquisitions.

Foolish takeaway

Overall this seems like a good fit for Gentrack’s strategy, however it looks expensive at face value. Hopefully Gentrack can extract meaningful synergies from the buy.

Gentrack shares look expensive, so I wouldn’t be buying shares today but it makes sense for the business to raise more cash at this level.

Instead of Gentrack, it might be better to put your investing cash into other better value growth shares like these exciting stocks.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. 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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