Shares in Gentrack Group Ltd (ASX: GTK) could come under pressure today after the company announced a second downgrade to its full year profit guidance this morning.
What Does Gentrack Do?
Gentrack provides billing and other types of software for essential service organisations such as energy businesses, water utilities and airports. It has offices in New Zealand, Australia, the UK, Singapore, USA and Europe. Gentrack provides services for over 220 utility and airport sites in more than 30 countries. One of its main customers is Sydney Airport Holdings Ltd (ASX: SYD).
Today’s Announcement
The company has advised that it now expects its full year earnings before interest, tax, depreciation and amortisation (EBITDA) for the 2019 financial year to fall between the range of NZD$25 and NZD$26 million.
This replaces the previous guidance of between NZD$27 and NZD$28 million, and constitutes a 7% decrease in expectations when taking the midpoint of the guidance figures.
Unfortunately, this isn’t the first downgrade. Only 2 months ago, the share price lost ground when management downgraded its original guidance to be “marginally ahead” of FY18 EBITDA of NZD$31 million.
For those unfamiliar, the video below explains what EBITDA is:
Management have blamed an increase in bad and doubtful debt provisions as a consequence of a deterioration of conditions in the UK utilities space over the past quarter.
Recent regulatory changes in the UK utilities market has resulted in a number of business failures and is contributing to widespread restructuring throughout the industry.
Gentrack will not release its full year results until November as its financial year runs from October 1 – September 30.
What Will The Gentrack Share Price Do Today?
It’s always hard to predict what share prices will do in the very short term. Nonetheless, the logical reaction would be for a decline in Gentrack’s share price commensurate with the decline in expectations. This would mean an approximate 7% decline this morning when the market opens.
In reality, there are a myriad of reasons why shares may trade either higher or lower than this. If investors had, in general, felt that expectations set by management were slightly too ambitious, there may be very little reaction. However, on the other hand, if investors feel that further downgrades could follow, they may respond savagely and slash the share price in the process.
Although investors can often be somewhat forgiving of a downgrade, when that becomes multiple downgrades a company can quickly lose the trust of investors.
With the market set to open soon, we won’t have to wait long to find out.
My Thoughts
I think Gentrack has a sound business with reasonably predictable earnings (the irony is not lost on me) and has the potential to steadily grow profits over the long term. Current regulatory issues in the UK are likely to sort themselves out in time and further share price falls could present an opportunity.
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At the time of publishing, Luke has no financial interest in any companies mentioned.
