Gentrack surprised the market this morning with a revenue and earnings downgrade. Pro-forma earnings before interest deprecation and amortisation (EBITDA) is now forecast to be 10.7%-13.6% below the prospective forecasts for the September 2014 period.
Gentrack is a developer of specialist software for energy utilities and airports around the world and as such it was perceived to be a lower risk IPO. The company was listed on the NZX and ASX on June 25, 2014 at $2.40 per share. UBS was the lead manager. The downgrade comes after just 27 days of trading on the market.
The downgrade will knock investor confidence in the IPO market, which was already beginning to feel strained. A downgrade after such a short time was particularly surprising because;
- the board, investment bank and other advisors should have a high level of confidence (and conservatism) in prospective forecasts provided to investors; and
- the company and industry were considered relatively low risk, due to a track record of profitability and revenue growth.
The reasons for the downgrade are a sober reminder to investors about the risks of small businesses dealing in large material contracts where a contract dispute or timing delay can have a material impact on companies’ results in a particular period. In this case, there were two compounding issues;
- A delayed implementation and a dispute over additional costs; and
- The delayed signing of an upgrade contract.
Downgraded earnings projections are rarely taken well by the market. However, in this case, management have done a good job in clearly quantifying and articulating the reason for the shortfall and provided investors with confidence in the future of the company. Management will now need to prove this confidence is well founded by delivering on its (unchanged) September 2015 forecasts.
Gentrack shares were trading at $2.24, at 3pm on August 1, down 34 cents per share (-13.2%). The shares have traded as low as $2.10 during the day.
Senior Equity Analyst
Disclosure of interest: Milford holds shares in Gentrack on behalf of investors.