Company Overview: Hansen Technologies Limited (ASX: HSN) is engaged in the development, integration and support of billing systems software for varied sectors, including utility, energy, telecommunications, etc. In addition to the above services, the company also provides IT outsourcing services and develops specific software applications. The company serves over 600 customers across 90 countries, helping them manage customer data and control critical processes of the business. Hansen Technologies Limited has divided its operations across two key verticals, namely Utilities and Communications. Earlier, the company’s customer base was largely from the Utilities sector, which was later balanced out after the acquisition of Sigma Systems, having its customer base primarily in the Communications sector.
 

HSN Details
 

 
1HFY20 Revenue up 28% Owing to Acquisition of Sigma Systems: Hansen Technologies Limited (ASX: HSN) provides software and services to the energy, water and communications sectors globally. HSN’s business is formally structured around the Utilities and Communications sectors, with over 1500 experts serving more than 600 customers on the field. Through its unique capabilities of enabling the design of new products and services by clients, the company has been a great support to millions of end-users across the globe. In 2020, the company entered the sixth decade of operations with its footprints spread across Australia, Canada, India, Norway, Denmark, Indonesia, Brazil, the UK and the US. The business has always been a customer centric platform and has a history of delivering well on the expectations of its customers and stakeholders.

In FY19, the company delivered on its strategic agenda and acquired Sigma Systems, adding enhanced capabilities on the platform. The company improved its suite of market offerings on the Communications front, with Sigma having its customer base primarily based in the Communications sector. Moreover, the acquisition has also enabled an improvement in the offering from the Utilities perspective, providing complementary capabilities and effective gateways in the wake of emerging challenges pertaining to decarbonization, deregulation, digitization, etc. During the year ended 30^th June 2019, the company reported operating revenue amounting to $231.3 million, up marginally on prior corresponding year revenue of $230.8 million. Underlying EBITDA for the year came in at $55.8 million, down 7% on prior corresponding period EBITDA of $60 million, as a result of lower non-recurring revenue and higher operating expenses. During the year, the company’s recurring revenue grew to 62.8% of total operating revenue, as the business transitioned to more recurring revenues to maintain the long-built reputation in the market. As the company acquired Sigma, it has significantly improved on its current service profile and is now capable of addressing a larger part of its customer needs, including customer quoting and ordering, product innovation, revenue management, etc.

Recently, the company released its results for the half-year ended 31^st December 2019, reporting double-digit growth in operating revenue and Underlying EBITDA, reflecting benefits derived out of an improved product suite and enhanced expertise. As a result of the developments during FY19, the company reported a record number of project wins collectively across the Utilities and Communications divisions.

As the business continues to benefit from Sigma and the increasing recurring revenues, the company is optimistic about delivering strong revenue growth in the second half, with a strengthened EBITDA margin. The business has been expanding continuously with new office openings and continued investment in development resources to meet market demands. The company has been dedicatedly working to develop sophisticated customer management and billing systems to match the rising complexities in the Utilities and Communications markets, placing the business well-positioned for future growth.

With continued investments in innovation and new capabilities added across the platform through strategic acquisitions, the company has built a strong financial profile. Over the period of FY14-FY19, operating revenue has reported a CAGR of 22%, with FY14 and FY19 revenue amounting to $86 million and $231.3 million, respectively. If the company delivers on its operating revenue guidance for FY20, compound annual growth rate is expected to improve to ~23.5% for the period FY14 – FY20. EBITDA for the period has also reported a decent CAGR of 17% and is expected to report further growth in FY20.


6 Years Past Performance Highlights (Source: Company Reports)

Highlights for the Half Year Ended 31^st December 2019: During the half, operating revenue came in at $144.3 million, representing an increase of 28% on prior corresponding period revenue of $112.4 million. Underlying EBITDA for the period came in at $34.1 million, up 20% on prior corresponding period EBITDA of $28.5 million. Underlying NPATA stood at $18.2 million, up 3% on prior corresponding period value of $17.7 million.

Revenue for the period was complemented by a contribution of $34.9 million from Sigma, with recurring revenue increasing to ~67% of the total revenue, up from 62.4% reported in the prior corresponding half. Recurring revenue for the half was $1.2 million higher than pcp in value, while non-recurring revenues went down by $4.2 million as a result of decline in one-off license fees and a decline in services revenue. The above decline came in as a result of closure of the consulting business within Enoro in the second half of FY19 and a reduction in call-centre revenue in the US. Cash flow, for the period, followed the seasonal trend of being at low levels in the first half due to working capital build. The Board declared an interim dividend amounting to 3 cents per share, payable on 26^th March 2020.


1HFY20 Financial Highlights (Source: Company Reports)

The first half was marked by a record number of project wins on the back of an improved product portfolio and an enhanced expertise profile delivering the desired customer experience. During the half, the company reported the first cross-sell by Sigma into the energy customer base, deploying its CPQ and Catalog products for Simple Energy in Australia. Other contract wins in the Utilities division included those from Aurora Energy in Australia, Entelios in Sweden and Finland, Fortum in the Nordics, and Lumme Energia in Finland. On the Communications front, Sigma deployed its products for clients, including Airtel, SmarTone and Vocus, across India, Hong Kong and Australia, respectively.


New Business Wins (Source: Company Reports)

Recent Update: The company released an announcement notifying that Don Rankin, director of the company, acquired 25,000 ordinary shares on 6^th March 2020, for a consideration of $84,665.

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 47.98% of the total shareholding. Othonna Pty. Ltd. held the maximum number of shares with a percentage holding of 17.55%, followed by Franklin Templeton Institutional, LLC holding 5.68% of the shares.
 

Top Ten Shareholders (Source: Thomson Reuters)

Key Metrics: For the half year ended 31^st December 2019, the company reported EBITDA margin of 25.4%, which is higher than the prior corresponding period margin of 24.3%. The margin improved well on the previous half’s EBITDA margin of 25.4%. Current ratio for the half came in at 1.70x, higher than prior corresponding period multiple of 1.47x, reflecting improved short-term liquidity. 


 Key Metrics (Source: Thomson Reuters)

Outlook & Guidance: Going forward, the company expects an improved working capital position, which was impacted by a significant increase in receivables during the first half as a result of seasonal northern hemisphere invoicing. Financial results for FY20 are expected to improve on the back of continued contribution from Sigma and enhanced customer experience. Operating revenue for the year is expected in the range of $300 million - $305 million, reflecting growth in the range of 29% - 32% on FY19. Underlying EBITDA is expected in the range of $72 million - $77 million, reflecting growth in the range of 29% - 38% on FY19.
 

Key Valuation Metrics (Source: Thomson Reuters)
 
Valuation Methodology: EV/Sales Multiple Based Relative Valuation

EV/Sales Multiple Based Relative 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 corrected by ~27% in the last one month and is currently trading close to its 52-week low level of $2.660. The company has reported robust financial growth in 1HFY20 and built a strong foundation for future growth through new business wins discussed above. The company has been continuously engaged in improving the quality of its product portfolio and ensures added expertise, enabling an enriching experience for its customers. We have valued the stock using EV/Sales based relative valuation method and arrived at a target price with an upside of lower double-digit (in percentage terms). For the purpose, we have considered peers like Bravura Solutions Ltd (ASX: BVS), Data#3 Ltd (ASX: DTL), Infomedia Ltd (ASX: IFM), etc. Hence, we give a “Buy” recommendation on the stock at the current market price of $2.810, up 1.812% on 20^th March 2020.
 
 
HSN Daily Technical Chart (Source: Thomson Reuters)

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