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

HSN Transforms its Business Structure: Hansen Technologies Limited (ASX: HSN) provides billing system software for the utilities, energy, pay-TV and telecommunication sectors. In addition, the company also provides IT outsourcing services and the development of other specific software applications. The company operates through 36 offices across the globe, with over 1500 experts deployed to serve more than 600 customers in 90 countries. In the highly competitive technology industry, the company uses its expertise to maintain a stand against competitors by adopting a personal approach to customer service. In December 2019, the company notified about the restructuring of the business into two key verticals – Utilities and Communications. After acquiring Sigma Systems, the company’s revenue will be equally sourced from both these segments. This transition will enable greater industry focus and expertise to customers across the globe. On the financial front, the company reported operating revenue amounting to $231.3 million for the year ended 30 June 2019 as compared to the previous year revenue of $230.8 million. Underlying EBITDA and NPAT for the year went down by 7% and 18.7% on the prior corresponding year, majorly as a result of lower non-recurring revenue.
 
Going forward, the company sees significant opportunities to grow its business as the importance of digital products in the utilities sector emerges. The acquisition of Sigma Systems seems to be a perfect fit for the business as the company can expand the value of the acquired business and provide enhanced capabilities to its customers. 2020 will see the integration of Sigma into the business and offering of significant features to the customers to overcome challenges involving deregulation, decarbonization, digitization of the business, etc.
 
Over the four-year period covering FY15-FY19, the company witnessed a CAGR of 21%, 16% and 15%, in revenue, Underlying EBITDA and underlying net profit after tax excluding tax effected amortisation of acquired intangibles and one-off items (NPATA), respectively. The journey of HSN’s success began in 1971, when the organisation started as a small family operation offering remote data storage within Australia. Since inception, the company has thrived hard to become a vast global company and serves its customers with innovative products and services. The company has now entered the sixth decade of operation with over 1500 experts serving customers in 90 countries. It remains confident about its ability to grow and create greater strengths and expertise.
 

Five-Year Performance (Source: Company Reports)
 
Financial Highlights: During the 12 months ended 30 June 2019, the company reported revenue and EBITDA of $231.3 million and $53.0 million, respectively, in-line with the guidance provided. In comparison to the previous year, revenue went up by 0.2%, and EBITDA went down by ~7%. The company delivered underlying NPAT amounting to $24.0 million, against a backdrop of challenging operating conditions for its customers. Adjusted earnings per share for the year came in at 17.1 cents, representing a decline of 13.5% on pcp, which was consistent with the NPATA decline. Dividend paid to the shareholders was also consistent with FY18 at 6.0 cents per share. FY19 reported the highest net debt to date at $148.3 million. However, the company remains well placed to maintain financial harmony with its cash generation capabilities. During the year, HSN generated operating cash flows amounting to $39.7 million, which were allocated to retire external debt and pay dividends amounting to $12.6 million during FY19.
 
Transition to a New Business Structure: As discussed above, the company recently restructured its business, providing equal weightage to its two key segments, namely Utilities and Communications. The business is now balanced between the two segments in terms of customers and revenue. While the communications division will be a composition of telecommunications and pay-tv customers, the Utilities division will entail the energy and water customers. Simon Muderack and Niv Fernando will be leading the Communications and Utilities divisions, respectively, as CEO.
 
Throwing light on Sigma Systems’ Acquisition: The company acquired Sigma Systems, effective 1 June 2019, for a consideration of $163.8 million, which represents a significant milestone for the business. The acquisition was funded through a new loan facility of $225 million which remained unused to the extent of $35 million at the end of the period. The acquisition has provided for significant expansion in the scale and scope of the communications sector with Sigma’s revenues concentrated in the Communications sector, and offers a re-balance to the company’s revenue portfolio, which was earlier weighted towards the Utilities sector. Inclusion of Sigma also comes with cross-sell opportunities into the vast customer base of the Utilities division, driven by the transformation happening in terms of pricing and products.
 

Revenue-Split Post Sigma Acquisition (Source: Company Reports)
 
Moving forward, the business aims to fully integrate Sigma into the broader HSN platform and develop cross-selling opportunities into the Utilities market. Moreover, the company is also aiming to leverage its network of low-cost development centres to improve customer delivery and business margins. The recent transition of the business will offer greater industry focus and tends to provide growth opportunities in the future.
 
Recent Changes in Board and Committee Membership: In a recent update to the exchange on 20^th December 2019, the company notified that Sarah Morgan stepped down from the position of Director and as a member of Audit and Risk & Remuneration Committees, with effect from 19 December 2019. Subsequently, the company appointed Don Rankin as the Chairman of the Audit and Risk Committee, and member of the Remuneration Committee.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 44.40% of the total shareholding. Othonna Pty. Ltd. is the entity, holding maximum shares in the company at 17.55%. Franklin Templeton Institutional, LLC is the second largest shareholder, with a holding of 5.68%.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: In FY19, the company improved on its liquidity position to pay off short term obligations of the business. At the end of the year, current ratio for the company stood at 1.89x, up from the previous year’s current ratio of 1.28x and higher than the industry median of 1.75x. EBITDA margin and net margin for the year came in at 23.5% and 9.3%, respectively. While profitability margins in FY19 declined in comparison to the previous year, the company’s results remained in-line with the guidance provided, with a strong and stable balance sheet supported by its cash generation capabilities.


 Key Metrics (Source: Thomson Reuters)  

Financial Guidance and Outlook: In FY20, the company expects to generate operating revenues in the range of $305 million - $310 million. EBITDA for the year is expected in the range of $70 million - $76 million. The guidance provided is inclusive of a full-year contribution from Sigma and excludes the impact of IFRS 16, which will be effective in FY20. The recent changes to the business structure after the acquisition of Sigma Systems, underpin future growth of the company through a re-balance across two key verticals, cross-sell opportunities and enhanced offerings to customers across the globe.


Key Valuation Metrics (Source: Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Approach

Price/Earnings Based Valuation (Source: Thomson Reuters)

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

Stock Recommendation: The stock of the company generated returns of 4.96% over a period of one year. In the last three months, the stock delivered returns of 2.86%. Currently, the stock is trading slightly above the average of its 52-weeks high and low of $4.290 and $2.850, respectively. Before entering a new decade, the business achieved several milestones on the operational front. With a vast network of experts serving a large customer base currently, the company remains confident in its capabilities to grow further and serve customers in diverse locations. FY19 was a period of significant operational achievements as the company won major contracts in Finland and Sweden. During the year, the company also expanded the Vietnam Development Centre to 100 employees, which will support its products in the Nordic, Americas and the Asia-Pacific regions. The newly developed analytics software-as-a-service product for the Utilities sector in the Nordic region continued to gain momentum. The business foresees various opportunities over the near-term with the emerging importance of digital products in the utilities sector and the evolving need to address challenges such as digitization, deregulation, etc.

We have valued the stock using Price to Earnings based relative valuation method and have arrived at a target price offering an upside of lower double-digit (in percentage terms). Considering the performance in FY19, strong balance sheet, growth anticipated through acquisition synergies, decent financial guidance for FY20, positive industry scenario, and valuation, we give a “Buy” recommendation on the stock at the current market price of $3.590, down 0.278% as on 17^th January 2020.

 
HSN Daily Technical Chart (Source: Thomson Reuters)

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