Company Overview: Hansen Technologies Limited (ASX: HSN) offers worldwide software and services to the water, communication, and energy sectors. In addition to the above services, the company also provides IT outsourcing services and advances explicit software applications. The company serves more than 600 customers across 90 countries and aids them to manage customer data and control the critical processes of the business. HSN has divided its operations across two key verticals, specifically Utilities and Communications. HSN is headquartered in Australia, and has offices in North and South America, South Africa, Europe, and the Asia Pacific region.
 

HSN Details
 

 
HSN Rides on Acquisition Synergies & Higher Recurring Revenues: Headquartered in Australia, Hansen Technologies Limited (ASX: HSN) is engaged in the expansion, integration, and support of billings systems software for the telecommunications and utility industries. The company has more than 40 years of experience and provides software and services to the energy, water, and communications sectors on a worldwide basis. The company employs more than 1,500 experts and serves over 600 customers with its proven and scalable solutions. Further, the company’s innovative and flexible offerings provide worldwide customer base with cost-effective end-to-end business solutions to enhance customers’ experience.
 
With the acquisition of Sigma, HSN has significantly improved its current service profile and is now capable of addressing a larger part of its customer needs, including customer quoting and ordering, product innovation, and revenue management. Notably, Sigma contributed ~$5 million of revenue in June 2019. 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. EBITDA for the period has also reported a decent CAGR of 17% and is expected to report further growth.
 

Past Performance Highlights (Source: Company Reports)
 
Going forward, the company remains optimistic about the Sigma acquisition and the increasing recurring revenues, which is likely to deliver robust revenue growth in the second half, with a strengthened EBITDA margin. The business has been growing continuously with new office openings and continued investment in development resources to meet increasing market demands. The company has been dedicatedly working to develop sophisticated customer management and billing systems, placing the business well-positioned for future growth.
 
Needle on FY19 Performance: In 2019, the company continued to stay focused on its market segments, being Utilities and Communications. In the Utilities sector, the company continued to ensure that product development is addressing its customers’ capability to augment new products to the customer and addressing the emerging billing complexity. Whereas in the Communications market, technology churn continued to accelerate, and the company took necessary initiatives to remain interacted with the world, increasing the demand for a broader range of innovative offerings. 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 program and acquired Sigma Systems, which specifically provides a solution to expand its offering and deliver competitive solutions quickly into the developing market. The acquisition will add enhanced capabilities on the HSN 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. In FY19, the business attained a noteworthy number of contracts wins to deliver its second billing system in Finland, subsequent to the go-live of the first system earlier in 2019. Also, per another contract win, the company was able to offer next generation Meter Data Management (MDM) solution in Sweden. Notably, the company also expanded its Vietnam Development Centre and now has approximately 100 employees, up from 9 employees in 2018. The company also took measures to develop its latest analytics software-as-a-service (SaaS) product for the Utilities sector in the Nordic region, which is gaining impetus with ~20 customers using the product.
 
During the period, the company reported operating revenue amounting to $231.3 million, a marginal increase of 0.2% from eth year-ago period. During the year, the company’s recurring revenue increased to 63% of total operating revenue, as the business transitioned to more recurring revenues to maintain the long-built reputation in the market.
 
1HFY20 Financial Highlights for the Period Ended 31st December 2019: During the period, the company reported operating revenue came in at $144.3 million, demonstrating a rise 28% year over year. Underlying EBITDA for the period came in at $34.1 million, up 19.7% on prior corresponding period, owing to higher contribution from Sigma acquisition. Underlying EBITDA margin for the period came in at 23.6% as compared to 25.3% reported in the year-ago period. Underlying NPATA stood at $18.2 million, up 3% year over year.
 

1HFY20 Financial Highlights (Source: Company Reports)
 
During the period, Sigma contributed $34.9 million to the total 1HFY20 revenues, with recurring revenue increasing to ~67%, up from 62.4% reported in the year-ago period. Recurring revenue for the half was $1.2 million higher than pcp in value, while non-recurring revenues went down by $4.2 million because of a decline in one-off license fees and a decline in services revenue. The above decline came in as a result of the shutting of the consulting business within Enoro in the 2HFY19 and a decrease in call-centre revenue in the United States. 
 

Recurring Revenues, Sigma and Ex-Sigma Highlight (Source: Company Report)
 
Balance Sheet $ Cash Flow Highlights: At the end of 31 December 2019, the company’s cash and cash equivalent amounted to $29.9 million and total assets stood at $563 million. Total borrowing at the end of the period amounted to $180.4 million. Operating cash flow for the period amounted to $18.2 million, up from $16.3 million in 1HFY19. Free cash flow for the period came in at $8.3 million. The Board declared an interim dividend amounting to 3 cents per share, payable on 26th March 2020.
 

Cash Position(Source: Company Report)
 
New Business Win a Key Catalyst: During the period, the company won number of projects on the back of its improved product portfolio and an enhanced expertise profile. 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.
 
Recent Update: The company released an announcement stating that FMR LLC and the entities listed in Annexure A, a substantial shareholder of the company, has decreased its voting power from 7.87% to 6.66%. In another update, the company notified that that David Trude, director of the company, acquired 923 ordinary shares on 26th March 2020, for a consideration of $3,092.05.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 47.92% of the total shareholding. Othonna Pty. Ltd. held the maximum number of shares with a percentage holding of 17.55%, followed by Long Path Partners holding 7.23% of the shares.
 

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: For the half-year ended 31st December 2019, the company reported EBITDA margin of 25.4%, which is higher than the prior corresponding period margin of 24.3%. 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: Refinitiv, Thomson Reuters)
 
What to Expect: In response to COVID-19, the company has allowed flexible working arrangements for its staff. The recurring revenues which the company originates from its customer relationships, provides HSN with a robust revenue foundation as it deals with the COVID-19 pandemic. As of now, HSN is not predicting any material impact from COVID-19 on its recurring revenue. The company is running its business with the availability of significant funding to assist with cash flow requirements. The company entered a safe $225 million syndicated multi-currency facility in May last year, which was due to mature on 30th April 2022. Although the company has withdrawn its formal earnings guidance for FY20, due to the uncertainty caused by COVID- 19, its continuous investments in innovation and new capabilities, will pull out the company stronger in the coming years and built a strong financial profile. 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.
 
 
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
 Valuation Methodology: EV/Sales Multiple Based Relative Valuation (Illustrative)

EV/Sales Multiple Based Relative Valuation (Source: Refinitiv, 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 ~7.8% in the last six months but went up 15.58% in the last one month and is currently trading at the lower band of its 52-week low level of $2.620. The company has an annual dividend yield of 1.88% and P/E multiple of 39.38x. 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 remains on track to continuously improve the quality of its product portfolio and ensures added expertise, enhancing customer experience. We have valued the stock using EV/Sales multiple based illustrative 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 Vista Group International Ltd (ASX: VGL), Data#3 Ltd (ASX: DTL) and Infomedia Ltd (ASX: IFM). Hence, we give a “Buy” recommendation on the stock at the current market price of $3.18, down 0.313% on 15 May 2020.
 

HSN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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