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Contrarian stock idea: Hansen Technologies

Under the Radar Report (UTTR) Editor Richard Hemming discusses the case to invest in small caps and the company's investment and analysis process.

Scroll down to read UTTR's contrarian stock call on Hansen Technologies.

CONTRARIAN STOCK CALL: HANSEN TECHNOLOGIES

Radar Rating: SPEC BUY
BULL POINTS
  • HIGH RECURRING REVENUE MIX
  • STRONG BALANCE SHEET AND CASH FLOW
  • GLOBAL BUSINESS
BEAR POINTS
  • CURRENCY RISK
  • ACQUISITION RISK
  • LUMPY PROJECT REVENUE
ASX Code: HSN
Market cap: $582 million
Net debt: $1 million
Dividend yield: 2.0%*

*FY 19 forecast

The global billing software specialist would be a good edition to any portfolio because of its defensive qualities: long customer relationships; a strong balance sheet; high recurring revenues; and dividends. After its 35% decline in the past nine months we think that it’s also good value.

 

Hansen Technologies: one-year chart



Source: nabtrade

 

Why we like it?

Hansen Technologies provides proprietary billing software for the energy, water, pay TV and telecommunications sectors around the world. The stock is good value trading at a forecast EV/EBITDA multiple of just under 11 times, which is well below the 17 times where ASX technology stocks are trading. Although Hansen is not a high growth stock it does have good defensive attributes. Having declined 35% in the past nine months we think it is worth adding a small position to your portfolio. It’s important to point out that the stock is very illiquid given around 56% of stock is tied up with the Hansen family and institutional funds.

 

What's new?

The company’s 1H19 result didn’t shoot the lights out but highlighted that this business can keep churning out the profits in any economic conditions. Revenues and EBITDA fell 5% and 16% to $112.4m and $28.5m respectively due to reduced one-off licence fees. The performance compared to the 2H18 was better with revenues held flat and EBITDA up 11% reflecting lower costs. The balance sheet improved with virtually no net debt on the books, which gives us confidence in the group’s ability to absorb any future acquisitions. The interim divided was held at 3 cents.

 

A steady tech performer

Hansen stands out having been around for almost 50 years and because its customers are firmly locked in due to high switching costs. This is a very good business model and we have been waiting for the opportunity for its shares to fall to showcase just why.

The company is run by Andrew Hanson whose father founded the billing software specialist and his family has retained an 18% sake. One of the keys to the company’s ongoing success is the steady stewardship that has positioned it as a leading provider of billing software in multiple markets.

This has delivered long-term revenue growth of 5% a year and double-digit profit growth. Even after recent price weakness, the dividend yield is relatively low, but we expect it to be maintained.

 

Why billing software is defensive

Billing software and its associated services of customer care and data management are products and services that are universally needed. Hansen’s revenues are even more defensive given the industries it services, which are (in order of importance): energy, telecommunications, pay TV and water.

The average term of a contract is around five years but the client relationships are closer to 10 years given the very high client retention rate. Changing billing and customer management software providers brings high risk for a client. A client would have to be very unhappy and/or expect significant benefits to want to change. On the flip side this makes it harder to secure new clients. It takes compelling events such as changes in regulation, deregulation, outgrowing their current systems for a client to have to change software providers.

 

Recurring revenues

We like businesses with annuity type revenues and around two thirds of Hansen’s revenues are recurring in nature, generated from licence, support and maintenance fees. The balance of revenues are non-recurring, coming from project work predominantly for existing clients. This can be lumpy but with over 500 clients work is relatively constant over time as clients need software upgrades to meet latest regulations and changes to enable new product rollouts.

 

Acquisition risk

Because of the difficulty in expanding the sales line and due to Hansen’s strong balance sheet, we envisage more acquisitions, which have been central to the company’s growth.

In mid-2017 Hansen acquired Enoro, a Norwegian software company for $95m, which gave it access the new market of data analytics and placed it in a leading position in the Nordic energy market. It also provides a good platform for growth into the broader European energy market and built Hansen’s existing position in the European telecommunications market. But this will take time, as it is a slow process to win new clients and then implement a new system. The company aims to increase the EBITDA margin for Enoro driven by this and other initiatives from around 16% to above 25% over time.

 

Investing to stay ahead

A key risk is disruption from new technology, but we like the fact the over 80% of Hansen’s staff are in development, which demonstrates its commitment and product development and implementation capabilities.

Acquisitions also bring risks, but the company has a good track record in this regard. Some of this risk is mitigated by the fact it buys similar businesses and does its own due diligence.

Keep in mind though that about a third of revenues are non-recurring that can be lumpy. Also currency risk comes from having over 80% of revenues coming from offshore.

 

Strong financials supporting development

The underlying reason for our belief in the long-term potential of Hansen is that its fundamentals are very strong. Hansen closed 31 December 2018 with $0.6m in net debt (gross debt of $22.7m and cash of $22.2m). The business generates good free cash flow allowing it to fund capital expenditure and product development, reduce debt and pay dividends. It is not a dividend stock though. The company keeps its powder dry for acquisitions and then aims to pay down debt.

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Richard Hemming is Editor of Under the Radar Report (AFSL 409518). All prices and analysis at 30 April 2019. This information contained on this website is general information only, which means it does not take into account your investment objectives, financial situation or needs. You should therefore consider whether a particular recommendation is appropriate for your needs before acting on it, and we recommend seeking advice from a financial adviser or stockbroker before making a decision. All information displayed on the website, is subject to change without notice. UTRR does not give any representation or warranty regarding the quality, accuracy, completeness or merchantability of the information or that it is fit for any purpose. The content on this website has been published for information purposes only and any use of or reliance on the information on this website is entirely at your own risk. To the maximum extent permitted by law, UTRR will not be liable to any party in contract, tort (including for negligence) or otherwise for any loss or damage arising either directly or indirectly as a result of any act or omission in reliance on, use of or inability to use any information displayed on this website. Where liability cannot be excluded by law then, to the extent permissible by law, liability is limited to the resupply of the information or the reasonable cost of having the information resupplied. No part of UTRR's publications may be reproduced in any manner, and no further dissemination of its publications is permitted without the express written permission of Under the Radar Report Pty Ltd.