Company Overview: Hansen Technologies Limited (ASX: HSN) is engaged in providing software and services to the water, communication, and energy sectors. Also, the company provides IT outsourcing services and advances in specific software applications. HSN has divided its operations across two key verticals – Utilities, and Communications. The company employs more than 1,500 experts and serves over 600 customers with its proven and scalable solutions. Additionally, HSN’s innovative and flexible offerings provide cost-effective end-to-end business solutions to enhance customers’ experience across the globe.
 

HSN Details
 
 


Higher Recurring Revenues & Buyout Synergies are Key Catalysts: Hansen Technologies Limited (ASX: HSN) is involved in the development, integration, and support of billings systems software for the telecommunication and utilities industries. The company is headquartered in Australia. With more than 40 years of experience, the company offers software and services to the energy, water, and communications sectors worldwide. The market capitalisation of the company stood at $584.78 Mn as on 26 June 2020.
 
The company remains focused on its market segments, being Utilities and Communications. In the Utilities segment, the company ensures that product development is addressing its customers’ capability to enhance new products to the customer and tackle the evolving billing complexity. Whereas in the Communications segment, technology churn continued to accelerate, and the company took essential plans to remain co-operated with the world, thereby 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. 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. The company also rides on several noteworthy contracts wins to deliver its second billing system in Finland, subsequent to the go-live of the first system earlier in 2019. Also, as per another contract win, the company was able to offer next-generation Meter Data Management (MDM) solution in Sweden. Notably, the company also prolonged its Vietnam Development Centre and now has approximately 100 employees, up from 9 employees in 2018. The company 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 approximately 20 customers using the product.
 
In the span of 5 years for a period ranging from FY14-FY19, operating revenue and EBITDA reported a decent CAGR of 22% and 17%, respectively, and is expected to report further growth.
 



Past Performance Highlights (Source: Company Reports)
 
Looking ahead, 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 company’s top priority amid COVID-19 pandemic continues to be the health and well-being of its staff and customers. The company has accelerated a number of initiatives resulting in the removal of certain layers of management and the optimisation of its global teams, including the acceleration of the Sigma integration. These initiatives along with new office openings and continued investment in development resources to meet increasing market demands, will act as a tailwind, going forward. The company has been working to develop sophisticated customer management and billing systems, placing the business well-positioned for future growth.
 
A Look at 1HFY20 Key Financial Highlight: During 1HFY20, HSN recorded numerous project wins, which included the first cross-sell by Sigma into its energy customer base, deploying for Simply Energy in Australia Sigma’s CPQ and Catalog products, integrated with its existing Customer Information System. This signifies the quality of HSN’s products and the knowledge of its people. In 1HFY20, the company’s operating revenue increased 28% year over year and amounted to $144.3 million, fueled by the contribution from Sigma after being acquired in June 2019. Underlying EBITDA for the period increased 19.7% year over year and stood at $34.1 million. 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 by 3% on pcp. It is worth mentioning that, Sigma contributed $34.9 million to the total 1HFY20 revenues, with recurring revenue growing to ~67% as compared to 62.4% reported in the year-ago period.
 

 
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. At the end of the period, total borrowing amounted to ~$205 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 Reports)
 
Recent Update: The company released an announcement stating that Franklin Resources, Inc. and its affiliates, has ceased to be a substantial shareholder of the company, effective from 19 June 2020.
 
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table which together form around 45.49% of the total shareholding. Othonna Pty. Ltd. held the maximum number of shares with a percentage holding of 17.52%, followed by Long Path Partners holding 8.48% of the shares.
 

Top Ten Shareholders (Source: Refinitiv, Thomson Reuters)
 
Key Metrics: For the half-year ended 31st December 2019, the company reported an 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)
 
Risk Analysis: As a technology-focused business, the company might face issues relating to managing security and taking care of customer data. Further, loss of any potential customer due to market competition and foreign currency fluctuation risk as the company operates internationally, poses a threat to its financial aspects. Moreover, high debt along with execution and integration risks due to higher investments in the M&A program remain potential headwinds.
 
Outlook: In light of the current economic condition and the initiatives taken by the company, it updated the market with its FY20 earnings guidance. For FY20, the company expects operating revenues to be in the range of $298 million - $300 million and EBITDA in the vicinity of $75 million and $76 million (which excluded the impact of IFRS16 and restructuring costs). The company remains on track to work with its worldwide customers and face the ever-changing environment led by the Covid-19 pandemic.
 
Further, the recurring revenues which the company originates from its customer relationships provide 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. Further, the company 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 ~18.73% in the last six months 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 2.03% and P/E multiple of 36.42x. The company continues to have decent funding to assist its cash flow requirements. Current ratio of the company stood at 1.70x in 1H FY20, reflecting YoY growth of 16.2%. This indicates that the company has improved its liquidity position to meet its short-term obligations. 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 an 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 Citadel Group Ltd (ASX: CGL), 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 $2.940, down 0.339% on 26 June 2020.
 
 
HSN Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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