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Why the Gentrack share price is down 39% in 2020

Tim Katavic
Losing Money

It has not been a good start to 2020 for dual-listed software provider Gentrack Group Ltd (ASX: GTK). The Gentrack share price has fallen 39% this year to $2.21 after releasing 2 announcements that disappointed investors. 

Adverse market conditions persist 

Last Wednesday, Gentrack announced that it is continuing to experience difficult market conditions in its key utilities markets. Regulatory price caps on electricity in the UK and Australia, in conjunction with competitive market conditions, has resulted in reductions and deferrals of IT investment. This has affected Gentrack’s sales pipeline to a larger degree than previously expected. 

Furthermore, E.ON, one of Gentrack’s major UK utility customers, has revealed that it intends to suspend deployment of its new Gentrack billing platform. E.ON is planning to focus resources on integrating the recently acquired Npower business. 

The difficult market conditions and E.ON’s decision prompted Gentrack to undertake a detailed re-forecasting exercise. The results of the exercise were released yesterday. 

Gentrack now expects FY20 earnings before interest, tax, depreciation and amortisation (EBITDA) to be between NZ$8 million and NZ$12 million. The company had previously announced in November that it expected FY20 to be broadly flat after reporting FY19 EBITDA of NZ$24.8 million. Thus, yesterday’s revision was a ~60% downgrade at the midpoint. The announcement was worse than what investors had priced in, with Gentrack shares tumbling 14.3% yesterday. 

Gentrack’s 4th earnings revision since July 

Yesterday’s downgrade was the 4th earnings revision the company has issued since July 2019. Gentrack initially expected a strong second half with FY19 EBITDA projected to be marginally ahead of the NZ$31.0 million reported in FY18.

In July, Gentrack revised its FY19 EBITDA forecast to be in the range of NZ$27 million to NZ$28 million. It attributed the downgrade to delays in customer projects and contracts, and bad debt risks in the UK. 

In September the company issued another market update. It adjusted its FY19 EBITDA forecast to be in the range of NZ$25 million to NZ$26 million. The downgrade was attributed to an increase in bad and doubtful debt provisions in the UK utilities market, which deteriorated over the quarter. 

The 3rd revision occurred in November when Gentrack announced its FY19 result and reported EBITDA of NZ$24.8 million. This narrowly missed the bottom end of the September forecast and was 19.9% lower than FY18. 

Cutting costs

Looking forward, Gentrack intends to reduce its cost base by around NZ$8 million on a full year basis. Approximately NZ$4 million of savings will occur in the current year. Notably, capitalised software development is forecast to fall from NZ$5.1 million in FY19 to NZ$1.0 million in FY20. The company is also continuing its transition from an upfront license model to a recurring SaaS model.

Whether the company can turnaround its fortunes after a difficult period remains to be seen. Investors will have to wait for the company’s AGM on 26 February for a further update. 

Other notable decliners in 2020 include Kogan.com Ltd (ASX: KGN) and Mosaic Brands Ltd (ASX: MOZ).

The post Why the Gentrack share price is down 39% in 2020 appeared first on Motley Fool Australia.

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Motley Fool contributor Tim Katavic has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Kogan.com ltd. 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.

The Motley Fool's purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool's free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. 2020