Company Overview: Hansen Technologies Limited is a global customer care and billing solutions provider that develops, implements and supports software, and delivers data center, application and implementation services for the energy, pay television and telecommunications industries. The Company's segments include Billing, which represents the sale of billing applications and the provision of consulting services in regard to billing systems; IT outsourcing, which represents the provision of various information technology (IT) outsourced services covering facilities management, systems and operations support, network services and business continuity support, and Other, which represents software and service provision in superannuation administration. Its geographical segments include APAC, which includes sales and services across Australia and Asia; Americas, which includes sales and services across the Americas, and EMEA, which includes sales and services across Europe, the Middle East and Africa.
 

HSN Details

Eyeing Growth Through Acquisition Synergies: Hansen Technologies Limited (ASX: HSN) is engaged in the development, integration and support of billing systems software for the utilities, energy, pay-TV and telecommunications sectors. The company has its offices across multiple locations servicing customers in over 80 countries around the world. The company has consistently delivered growth in earnings and has grown its revenue base from $100 million to more than $230 million in the span of five years. In FY19, the company performed well and in-line with the guidance provided. The recently acquired Sigma business was in the limelight, that led to a substantial increase in the debt. The synergistic acquisition will provide a larger customer base, rebalance in its portfolio both vertically and geographically, and entry into the new markets, i.e., India and Hong Kong. The company is now looking forward to an improvement in its margins from the business acquired. Revenue during the period increased by 0.2% and underlying NPATA went down by 12.8%. Dividend for FY19 stood at 6.0 cents per share, which was consistent with the dividends paid in FY18. However, the company also paid a special dividend of 1.0 cent in FY18. Over the period covering FY15 to FY19, the company has seen an upward trend in the revenue generated, with FY19 revenue remaining nearly flat in comparison to FY18. Top-line CAGR growth over the aforesaid period stood at ~21% with FY15 and FY19 revenue amounting to $106.3 million and $231.3 million, respectively. Underlying EBITDA over the period depicted mixed trends with an overall CAGR growth of ~16%. Underlying NPATA for FY15 and FY19 was reported at $19.1 million and $33.7 million, representing a 5-year CAGR growth of around 15%.

Net debt during the year stood at $148.3 million, as compared to $27.2 million in the prior corresponding period. The increase in debt was attributable to the payment made for the acquisition of Sigma, which was funded by a new bank debt facility of A$225 million. Additionally, in FY18, the company decided to go to market with a new unified brand, HansenCX, to increase awareness about its brand outside Australia. The ‘CX’ in HansenCX refers to customer experience, which represents a strong focus on servicing the clients’ needs.

Going forward, the company expects further incremental margin improvement over the next few years from the acquisition of Enoro business acquired in July 2017. While the acquisition resulted in an improvement in revenue and margins, there lies an enormous opportunity to generate further increased profitability from the business. In addition, the company has entered FY20 with great momentum and expects more to come over the remainder of the year.


Performance – FY15 to FY19 (Source: Company Reports)

Performance in FY19: During the year, the company generated operating revenue amounting to $231.3 million, up 0.2% on prior corresponding period revenue of $230.8 million. Underlying EBITDA for the year was reported at $55.8 million, down 6.9% on prior corresponding period value of $60.0 million. Underlying NPATA reported a decline of 12.8% at $33.7 million. Adjusted EPS for the period stood at 17.1 cents, down 13.5% on prior corresponding period EPS of 19.8 cents. A final, partially franked dividend of 3.0 cents per share was declared that would be paid to the shareholders on 26 September 2019.
 

FY19 Financial Summary (Source: Company Reports)
 
Operational Highlights:

(a) FY19 was characterised by a major contract win to deliver the second billing system in Finland and another contract to deliver the next-generation Meter Data Management (MDM) solution in Sweden.

(b) In another recent announcement of 18 September 2019, the company notified the exchange that it has signed a multi-year contract signed with Finland based Elenia for implementation of its next-generation meter data management (MDM) product for the Nordic energy market.

(c) The company expanded its Vietnam Development centre that now comprises of 100 employees as compared to 9 employees in 2018.

(d) The period also saw the commencement of 8 client upgrades to the new version of the US municipalities billing system.
 

Synergistic Acquisition with Sigma Systems: In June 2019, the company completed the acquisition of Toronto based Sigma Systems for a consideration of $163.8 million. With Sigma comprising of a vast network of 70 customers and 480 employees, the combined business will enable HSN to address a larger part of its customer needs. With the inclusion of Sigma into the business, the company has obtained a balance between its two primary business verticals, Utilities and Communications.


Sigma’s Customers (Source: Company Reports)

Cash Flow and Debt: Free cash flow for FY19 amounted to $30.1 million out of which $20.0 million was attributable to the second half. 2H19 saw an improvement of $4.8 million in working capital. During the year, the company secured a loan facility of $225 million for the acquisition of Sigma, which was strongly supported by a syndicate of local and international banks. At the end of the year, $35 million of the facility was unused, and the company had a net debt of $148.3 million.

As the business moves ahead, the company is looking forward to successful integration of the recent acquisition of Sigma business into its platform. The company will continue pursuing its operating strategy of providing billing and related data management solutions to the targeted segments while assessing appropriate acquisition opportunities to enhance shareholder value. FY20 has been a great start with the company entering into new markets in India and Hong Kong for Sigma and is expected to offer more value to the business over the remaining period.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 41.17% of the total shareholding. Othonna Pty. Ltd. holds the maximum interest in the company at 17.57%, followed by Mawer Investment Management Ltd holding 7.52% of the shares.
 
Top Ten Shareholders (Source: Thomson Reuters)
 
Key Metrics: During the financial year ended 30 June 2019, the company had a current ratio of 1.89x which was higher than the prior corresponding period figure of 1.28x and also higher than the industry median of 1.82x, and, therefore, looks like HSN has decent liquidity levels which could help it in meeting short-term obligations. EBITDA margin for FY19 was reported at 23.5% and net margin for the period stood at 9.3%. RoE and ROIC stood at 9.0% and 5.7%, respectively in FY19.


Key Metrics (Source: Thomson Reuters)  

Outlook & Guidance: The company has added significant breadth and depth to its global platform through the recent additions of Enoro and Sigma, with both businesses expanding Hansen’s footprints into dynamic market segments. Both businesses have the potential to drive future revenue growth. The company has entered FY20 with great momentum and expects to see more development coming over the remainder of the year. In FY20, the company expects to generate revenue in the range of $305 million - $310 million. EBITDA of the year is expected to be between $70 million and $76 million. The guidance provided includes a full year contribution from Sigma and excludes the impact of IFRS 16, that treats operating leases as finance leases and will be effective in FY20.


 Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Approach:

EV/EBITDA Multiple Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM-Next Twelve Months

Stock Recommendation: In FY19, the company’s financial results were in-line with the guidance both in terms of expected revenue and expense base, delivered against a backdrop of challenging operating conditions for the company’s customers. Post-acquisition of Sigma in June 2019, the company significantly expanded the scale and scope in the communications sector with the combined offering meeting a bigger part of customer needs. The integration of Sigma Systems rebalanced Hansen’s portfolio both vertically and geographically. Through the newly signed contract with Elenia, the company gained access to its large customer base of 430,000 customers in Finland, that further strengthened its position in the Nordic region. The company has been taking steps to improve its EBITDA margin through a reduction in its cost base. The expansion of the Vietnam development centre and acquisition of Sigma will help to improve margins in the future. Moreover, the company is also expecting an incremental margin improvement from the Enoro business. As per the guidance provided for FY20, operating revenue, including a full year contribution from Sigma is expected to report growth in the range of 31.86% - 34.03%. FY20 growth range for EBITDA is expected to be 25.45% - 36.20%. Overall, FY19 depicted a decent financial performance in line with the guidance with the acquisition of Sigma being the highlight of the financial year. Going forward, the company has further growth opportunities in store from the acquisitions of Sigma and Enoro. Considering the above factors, we have valued the stock using a relative valuation method, i.e., EV/EBITDA multiple and arrived at a target price upside of lower double-digit growth (in percentage term). Hence, we recommend a “Buy” rating on the stock at the current market price of $3.48, up 2.655% on 20 September 2019.

 
HSN Daily Technical Chart (Source: Thomson Reuters)

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