The S&P/ASX 300 Index (ASX: XKO) tech stock Gentrack Global Ltd (ASX: GTK) has delivered enormous returns in the last few years, rising by almost 600% from November 2022, as the chart below shows. One expert believes there are more gains to come.
Fund manager Airlie Funds Management still believes in the long-term potential of the company, which is a global provider of enterprise software to utilities and airports around the world.
Gentrack's clients include Sydney Airport, Auckland International Airport Ltd (ASX: AIA), London Gatwick, Christchurch Airport, Bristol Airport, Npower, SSE, Dodo, Vocus, Amber, London Stansted, Manchester Airport and Red Energy.
Airlie says that the utilities side of the business accounts for most of its value. Gentrack's software handles customer information, billing, data, and energy management.
Why Airlie likes Gentrack shares so much
The fund manager likes businesses that sell mission-critical enterprise software, which typically sees very low customer churn due to how "costly and disruptive" it can be for customers to switch.
Software upgrades can cost between $50 million and $250 million and take a year or two to implement.
This means the revenue of the ASX 300 tech stock is predictable and annuity-like, making it very durable compared to most of the software industry.
Will Granger, portfolio manager at Airlie, explained why Gentrack has a significant opportunity to capture market share in the coming years:
The opportunity… lies in the fact that the energy transition is vastly increasing the complexity of the energy grid. Historically, energy grids were largely characterised by centralised power generation and one-way distribution.
However, the grid is becoming increasingly decentralised, with assets like solar panels, EVs and batteries enabling consumers to generate, store, and buy and sell energy off the grid.
This vast increase in the complexity of the grid means that the software many of these utilities are operating on – some of which is 20 to 25 years old – is no longer fit for purpose and needs to be upgraded.
Granger said some energy grids — particularly in Gentrack's core markets of Australia, New Zealand and the United Kingdom — were further along in this transition than others.
In these markets, SAP and Oracle have ceded significant market share to the specialist providers. If this trend serves as a proxy for other global markets, there is a substantial market share opportunity ahead of Gentrack.
Management team
Airlie is also attracted to the leadership team at the ASX 300 tech stock.
Granger highlighted that CEO Gary Miles had "an impressive track record in enterprise software, having run and sold two separate enterprise software businesses, one of which he co-founded".
The Airlie expert pointed out that Gentrack's chief technology officer held the same role at cloud accounting software business Xero Ltd (ASX: XRO).
Why is this a good time to invest in this ASX 300 tech stock?
Airlie noted that the FY24 result was "particularly encouraging," with the company seeing "strong profit margin expansion" on an underlying basis. This gives the fund manager more confidence in its belief that profit margins can recover.
Granger noted that Gentrack shares are now trading at approximately 33x Airlie's forecast for FY25 operating profit (EBITDA), but its profit margins "remain depressed versus history".
If the company's profit margin recovered back to historical levels of around 30%, the EBITDA multiple drops to "just 19x". Granger thinks this "looks attractive relative to the market share opportunity ahead of the business as well as other software peers."
The Airline fund manager concluded its positive thoughts on the ASX 300 stock with the following:
While we do not expect margins to fully revert to historical levels in the near term, this underscores the potential operating leverage that lies ahead. Consequently, we continue to see compelling long-term value in Gentrack, and it remains a core holding in the fund.
