Auckland-based software-as-a-service provider Gentrack Group Ltd (ASX: GTK) this morning announced it’s seeking to raise NZ$90 million from shareholders to pay down bank debt after a recent shopping spree that included four acquisitions totalling NZ$138 million.
Gentrack provides software to enterprise clients in the energy and airports space and acquisitions since March 2017 include Junifer Systems (NZ$90 million), CA+ (NZ$12 million), BlipTrack (NZ$8 million) and Evolve Analytics (NZ$44 million).
The dual-listed group is offering new shares to ASX investors at around A$5.66 (NZ$6.19) depending on the July 6 exchange rate which represents a hefty discount of 11.4% to the last ASX exchange traded price of $6.40.
Investors will be able to take up 1 new share for every 5.7 held or will have the option to be diluted and sell their entitlement rights in exchange for a cash payment.
Much of Gentrack’s rapid earnings and top line growth over the past few years has been powered by the acquisitions and as such the capital raising is a bit like the sobering reality of being handed the restaurant’s bill after a raucous dinner party.
Still it’s the future that counts and part of the reasoning behind the capital raising is so that Gentrack has the balance sheet firepower to make more acquisitions if it can identify companies that will improve the business and add value to shareholders.
So far its management team has a reasonably good track record of doing so with a compound annual growth rate in EBITDA (operating income) of 15% over the last seven years, although the ballooning debt profile has of course contributed to this return.
Gentrack boasts some impressive economics with 60% of revenue recurring in nature and high gross profit margins given the software-as-a-service nature of the business. It also reports that its products are reasonably sticky, which is backed up by the reasonably high retention rate of customers.
Gentrack’s success and business model is no secret anymore though with the group trading on a high multiple of annual profits. The dilution around the capital raising may act as a weight on the share price over the short-term at least so this looks a business for investors’ watch lists as a substantial fall in value would be a buying opportunity in my opinion.
For now I’d still rate the stock a hold on valuation grounds.
While Australia boasts an especially fast-growing business worth knowing about in the small-cap space…