Two ugly-ducking IT stocks that may have reached an inflection point

Despite some positive narratives looming for a number of IT stocks, the sector at large ended the day with largest falls, down -1.33% on the back of tomorrow’s expectant 0.50bps rise in interest rates, which lifts the cost of capital, making non-cash-generating businesses less attractive from a valuation perspective.

Two stocks to finish today’s session down more than the sector at large were small-caps, including provider of financial software solutions Bravura Solutions (ASX: BVS) down -1.62% and dual-listed NZ company Gentrack (ASX: GTK) which was down -3.32% at the close.

Gentrack

While Gentrack’s share price has been trending down since early January, the billing software maker jumped 14% last Friday after increasing guidance for its full year FY22 result, due out 29 November.

While light on specifics, management now expects revenue of around $125m, up 18% on last year’s $106m, while operating profit is expected to be in the mid-to-high-single digits (NZ$m) versus the low-single digits previously forecast.

Admittedly, earnings are expected to remain a little volatile, especially in the UK – which accounts for around half total revenue – which has suffered at the hands of rising energy prices, and bankruptcies in the utility sector.

Cash flow positive

However, investors can take some comfort from the interim result, when the company posted an encouraging increase in new customers, and a 12% rise in revenue to NZ$57m for the six months to 31 March, despite 12 UK customers becoming insolvent during that period.

Unlike a lot of the company’s peers, investors should also give Gentrack some props for at least providing a positive return on invested capital (ROIC).

The company ended the half year with a cash position of $16.5m versus $26m at September 2021.

After three profit downgrades in 2020, due to its badly failing UK division, there’s growing optimism that a nimbler supplier like Gentrack will benefit from utility and energy providers needing to upgrade their systems to help consumers understand the energy efficiency of their service.

Consensus does not cover this stock.

Based on Morningstar’s fair value of $2.61 the stock appears to be undervalued.

Gentrack share price over 12 months.

Bravura Solutions

Not unlike Gentrack, Bravura’s share price has been trending south year-to-date, and it now trading at around half the $2.45 it started the year at.

Earnings (EBITDA) were 61% higher to $25.3m at the half year, on revenue of $132.3m, up 14%.

However, the stock shed -17% late February after management guided to FY22 earnings (EBITDA) in the range of $45m to $50m while the revised guidance for FY22 NPAT was in the range of $25m to $30m, below previous guidance provided at the November 2021 AGM.

The company ended FY22 with NPAT of $25.7m down -20% and FY22 EPS were down -14% to 12.1cps.

Cautiously optimistic

But despite the disappointing result, the pipeline commentary and the potential for cost growth to slow in the second half FY23 has left Macquarie cautiously optimistic.

Equally encouraging, the stock ended the year with cash of $48.7m and delivered a return on total capital of around 10%.

The broker retains an Outperform rating on Bravura, while the target price was cut to $2.40 from $3.45 late August.

The broker remains optimistic that a strategic review and FY23 guidance at the AGM (22 November) may show signs that the company is also nearing an inflection point.

Ord Minnett recently cut near-term forecasts to reflect continuing cost pressure but recognises the company's solid position, and offering and retains a Buy rating while the target price falls to $1.75 from $2.35.

Goldman Sachs maintains a Neutral rating (target price $1.55) and reduces FY23/24 earnings estimates by -14/-17% to account for slower revenue growth and higher costs.

Bravura Solutions share price snapshot.