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
 
Increase in Scale of Operations in FY19: Hansen Technologies Limited (ASX: HSN) is engaged in the development, integration, and support of billing systems software for the utilities, energy, pay-TV and telecommunication sectors. Other activities include IT outsourcing services and the development of other specific software applications. The market capitalisation of the company stood at $686.97 million as of 18 October 2019. The company, in FY19, delivered a decent set of numbers after the record 2018 year. Top-line and EBITDA were in-line with the provided guidance. The company enjoyed decent cash flows of $30.1 million with a stable customer base, providing annuity style revenue with targeted 25% to 30% EBITDA margins, allowing the company to pay down debt while strengthening the balance sheet to fund further business combinations. The year was also marked by the latest acquisition of Sigma Systems business (Sigma), completed in June 2019, of which, one-month performance was included in the Group’s results for FY19. The acquisition rebalanced the company’s portfolio to ensure greater diversification across multiple industries, regions and clients.

Looking at the past performance of the company, top-line over the period FY15-FY19 posted a CAGR growth of 21% from $106.3 million to $231.3 million from FY15 to FY19. Underlying EBITDA of the company witnessed a rise from $31.3 million in FY15 to $55.8 million in FY19 with a CAGR growth of 16% over FY15 – FY19, indicating that the business generated stable earnings and enjoyed good financial health. NPATA (net profit after TAX excluding tax-effected amortisation of acquired intangible) increased from $19.1 million to $33.7 during the time span of 2015-19, reporting a CAGR of 15%, indicating that the company is capable of controlling its costs.

Going forward, with a track record over the past 11 years of making value creative acquisition, including the latest Sigma; extended footprint into new markets and segments; diversified customer base; balanced of market portfolio, strong free cash flows, etc., the company is well placed for future growth.

Five Year Performance Analysis (Source: Company Reports)

FY19 Performance Highlights: The company declared its annual report for the year ended 30 June 2019, in which, the company posted a revenue of $231.3 million as compared to $230.8 million in FY18. Top management of the company stated that Enoro and Sigma, recent additions in the business will drive future revenue growth. During the year, the total operating expenses went up from $195,791,000 to $ 205,181,000 in FY19. This implies a significant increase in scale to the operations throughout all the major expense areas. The company also announced the signing of a multi-year contract with Finnish-based Elenia, for the completion of the next-generation meter data management product for the Nordic energy market which is expected to go live in early 2021. HSN is focused on helping its customers to create, sell and deliver products and services and providing flexibility to support new business initiatives. During the year, the group generated an operating cash flow of $39.7 million, which was used to redeem external debt and to fund dividends of $12.6 million during the year. The Company generated strong cash and, thus, is well placed to retire its debt over the upcoming years. During the year ended 30 June 2019, EBITDA and NPATA of the company declined by 6.9% and 12.8% from $60 million to $55.8 million, and from 38.7 million to $33.7 million, respectively. This decline in NPATA led to a fall in EPS by 13.6% to 17.1 cents per share.


Financial Performance (Source: Company Reports)

EBITDA margin declined from 26% in 2018 to 24.6% in FY19. This decline was a direct result of lower non-recurring revenue as an expense base as similar to that of FY18, and the company has taken steps to reduce the cost base to improve the margin. The Company is also expecting an incremental margin over the next few years from Enoro business as there were increase in revenue and margins since the acquisition. The company declared a final dividend of 3 cents per share, partially franked to 2.6 cents, the payment of which was made on 26 September 2019.
 

EBITDA margin (Source: Company Reports)

Segment wise performance:
In the communications market, technology continued to hasten with the world’s reliance on smart devices and the desire to interact with the world increased the demand for a broader range of innovative offerings. The company has displayed itself in various entertainment options being delivered on mobile devices, together with an explosion in the number of apps letting to interact with each other.

In the Utilities sector, the production of green energy continued to rapidly develop, resulting in, lowering the cost of production and increased the retail demand for the product. HSN has continued to ensure that product development is addressing the customers’ ability to add new products to its customer offerings and addressing the emerging billing complexity.

Geographical Bifurcation of the Revenue
Geographically, the company’s portfolio was majorly tilted towards the EMEA, accounting for 50% of the revenue, followed by Americas and APAC at 31% and 19%, respectively.

    
Revenue by Vertical and geography (Source: Company Reports)

Synergistic Acquisition of Sigma: The company acquired Sigma Systems for $163.8 million on 1 June 2019, funded by the debt facility of $225 million. This was the largest acquisition made by HSN and would enhance the scale and scope in communication sector. The acquisition of Sigma has resulted in the re-balancing of the Group’s market portfolio which, post the acquisition of Enoro in FY18, was initially weighted towards the Utilities sector providing a solution to address provider’s ability to expand its offering and deliver competitive solutions quickly into the evolving market. With Sigma’s revenues concentrated in the Communications sector, the Group’s revenue portfolio is now re-balanced to ensure greater diversification across multiple industries, regions and clients.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 46.94% of the total shareholding. Othonna Pty. Ltd. holds the maximum interest in the company at 17.55%, followed by Mawer Investment Management Ltd. holding 7.51% of the shares.
 

Top Ten Shareholders (Source: Thomson Reuters)

Overview of Hansen’s Investment profile: Hansen is a significant global player, the customers of which are diversified by industry, geography and currency. The global presence, therefore, enables the company to leverage experience by sharing learnings and product development. Approximately 63% of the company’s revenue is recurring which is mainly derived from periodic maintenance, support and license fees. EBITDA margins delivered strong cash flows and a good track record of successful acquisitions and have made 10 additions to the group.

Key Metrics: During the year ended 30 June 2019, the company had an EBITDA margin for the year stood at 23.5% as compared to 25.2% in FY18. Net margin of the company came in at 9.3% for FY19, and this was a bit lower in comparison to FY18 and FY17 net margin of 12.5% and 13.7%, respectively. RoE of the company stood at 3.5% in FY19, lower than the industry median of 11.1%. Current ratio in FY19 at 1.89x, was higher as compared to 1.28x in FY18 and industry median of 1.82x.


 Key Metrics (Source: Thomson Reuters) 

Operational Highlights: During FY19, the business achieved a significant number of operational highlights, wherein major contracts were signed to deliver the second billing system in Finland and Meter Data Management solution in Sweden. The company also expanded their Vietnam Development Centre and now have 100 employees, up from nine employees in FY18.

Outlook: HSN’s people, products, system and processes are expected to drive growth for the company in FY20 and beyond. It is also expected that the operating revenues would range in between $305 million to $310 million and EBITDA to lie in between $70 million to $76 million in FY20. This guidance accounts the contribution from Sigma but excludes the impact of IFRS 16. The acquisitions of Enoro and Sigma would help the company to improve the profitability. The company anticipates entering the FY20 with signing of new logos, including the market entries in India and Hong Kong. The company will specifically focus on investigating and developing cross-selling opportunities into the Utilities market and will leverage investment in Sigma’s intellectual property.
 

Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodologies:
Method 1: Price to Cash Flow Approach

Price/Cash Flow Valuation (Source: Thomson Reuters)

Method 2: Price to Earnings Based Valuation

PE- based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, *NTM: Next Twelve Months
 
Stock Recommendation: The acquisition of Sigma Systems by the company would increase the profitability of the company. HSN is also planning to enter the markets of India and Hong Kong, which would lead to the expansion and higher footprints of the company. Further, the company showed a significant growth in its revenue, EBITDA and NPATA over the years, showing a CAGR of 21%, 16% and 15%, respectively.  The performance of the stock went down by 13.90% in the past 3 months but up by 7.43 % in the past one month. Currently, the stock is trading slightly below the average of 52-week high and low levels of $4.290 and $2.850, respectively with a PE multiple of 31.83x an annual dividend yield of 1.73%, indicating a decent opportunity for accumulation. Considering the aforesaid facts and decent outlook, we have valued the stock, using two relative valuation methods, i.e., Price to Cash Flow and Price to Earnings multiples, and arrived at a target price of lower double-digit growth (in % term). Hence, we recommend a “Buy” rating on the stock at the current market price of $3.510, up 1.153% on 18 October 2019.

 
HSN Daily Technical Chart (Source: Company Reports)

Disclaimer
 
The advice given by Kalkine Pty Ltd and provided on this website is general information only and it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your investment objectives, financial situation and needs before acting upon it. You should seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice. Not all investments are appropriate for all people. Kalkine.com.au and associated pages are published by Kalkine Pty Ltd ABN 34 154 808 312 (Australian Financial Services License Number 425376). The information on this website has been prepared from a wide variety of sources, which Kalkine Pty Ltd, to the best of its knowledge and belief, considers accurate. You should make your own enquiries about any investments and we strongly suggest you seek advice before acting upon any recommendation. Kalkine Pty Ltd has made every effort to ensure the reliability of information contained in its newsletters and websites. All information represents our views at the date of publication and may change without notice. To the extent permitted by law, Kalkine Pty Ltd excludes all liability for any loss or damage arising from the use of this website and any information published (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine Pty Ltd hereby limits its liability, to the extent permitted by law to the resupply of services. There may be a product disclosure statement or other offer document for the securities and financial products we write about in Kalkine Reports. You should obtain a copy of the product disclosure statement or offer document before making any decision about whether to acquire the security or product. The link to our Terms & Conditions has been provided please go through them and also have a read of the Financial Services Guide. On the date of publishing this report (mentioned on the website), employees and/or associates of Kalkine Pty Ltd do not hold positions in any of the stocks covered on the website. These stocks can change any time and readers of the reports should not consider these stocks as personalised advice.