Gentrack did not mislead investors, says FMA

The Financial Markets Authority has decided not to take a case against Gentrack Group [NZX: GTK] after finding the company's initial public offer prospectus was not misleading for investors.

The airport and utility software developer alarmed the market when it announced on August 1 it would not meet its prospectus forecast for 2014 sales and profit because of a payment dispute and contract delays.

At the time, Gentrack chief executive James Docking defended the guidance cut as reflecting the complex nature of the company’s projects, and said thorough due diligence and expert advice went into the prospectus.

FMA released its review this morning, saying Gentrack’s offer documents did not contain any untrue statements and were not misleading, but could have been clearer in addressing the likelihood and potential impact of certain risks.

“We are of the view that Gentrack followed a thorough and appropriate due diligence process, though some aspects of that process could have been improved by better recording of the directors’ assessment of the likelihood of risks,” the report said.

FMA found Gentrack’s offer documents placed an emphasis on its “stable revenue base”, however 30% of Gentrack’s revenue is from major projects that do not deliver a stable revenue stream. More information about the non-stable revenue streams should have been included in the offer documents, FMA said.

Gentrack’s offer documents included warnings about generic risks associated with one-off projects such as major software projects, but did not include any reference to the specific project delays which prompted the earnings downgrade.

However, the FMA found this did not mean the prospectus was false or misleading to investors, and will not take any action against Gentrack or its directors.

Gentrack listed on the NZX on June 25 after an IPO in which shareholders, including chairman John Clifford and Mr Docking, sold $63 million of existing shares along with $36 million of new capital used to repay debt and IPO costs.

FMA also found no conflict of interest arose from Gentrack directors selling shares, and this did not have an impact on the due diligence committee.

While FMA thought proper due diligence was done on the prospectus, it said “there were shortcomings in the recording by directors of their views on the likelihood of any impact of the delays on the financial forecasts”.

At the start of September Gentrack announced the delayed contract that prompted the earnings downgrade was signed.

The company believes pro forma earnings before interest, tax, depreciation and amortisation (ebitda) will be between $12.1 million and $12.5 million for the financial year ending September 30, a decline of 10.7%-13.6% on its prospectus forecast.

Net profit is expected up to $1.2 million lower at between $2.5 million to $2.8 million on revenue of $38.1 million to $38.5 million, a decline of 5.2%-6.2%.

FMA’s review did not cover Gentrack’s continuous disclosure obligations under the Securities Markets Act or the NZX listing rules – these matters have been reviewed by NZX.