BUY HOLD SELL – Hansen Technologies (ASX: HSN)
Hansen Technologies (ASX: HSN) is a billing software provider that serves 600+ customers in over 80 countries. Most of its customers are in the utility space – think gas, electricity, water and communications industries.
The company has been in focus recently following a deal with German telco provider, Telefonica, back in March. The agreement was for a fixed initial term of five years with associated revenue of approximately $25m. Hanson upgraded FY21 revenue guidance on the Telefonica news, with underlying EBITDA margins expected to improve ~5% on previous estimates. The stock jumped 24% on the day, with the deal regarded by management as a glowing endorsement for the business which derives the majority of its revenues out of Europe and the US; 55% and 24% respectively, with only 21% coming from Australia.
More recently, HSN reiterated the above-mentioned guidance and added long-term goals of revenue ~$500m by FY25. EBITDA margin is expected to ease back a touch, with the company pointing to a 10c annual base dividend with any excess cash to be returned via special dividends.
HSN was named in the AFR’s list of Small-cap stocks that should be on your radar in January, Steve Black, of Pengana Emerging Companies Fund was quoted saying Hanson has a “good potential to build a larger global business in the coming decade and drive faster earnings growth.” To lean on Henry’s parlance, Hanson is arguably tech in a cardigan, overlooked by a market thirsty for high growth tech stocks. It doesn’t offer the same level of growth or flashy outlook given the slow and steady nature of the utilities and telcos sectors that it services, but what it lacks in growth appeal, it makes up for in its diversified and low-risk nature. That sentiment reaffirmed by Baillieu analyst Nicolas Burgess, who says, “the business is in good shape, with earnings performance reflecting the essential nature of its core services.”
The company has enjoyed a slowdown in capital expenditure, as it has finished building a development centre in Vietnam. High capex had been weighing on the share price. The other concern for the business was its reliance on revenue from licence fees, with management working hard to get that down to 3% from 10% in the last few years. On a more positive note, the integration of Canadian software company Sigma – which HSN acquired in 2019 – is considered to be a catalyst for organic revenue growth in the medium term.
- Solid numbers: ROE of 25.2% is excellent, forecasts see it slipping to 17.9% in FY22.
- EPS and revenue growth expected this year but consistency is lacking with estimates pointing to lumpy numbers.
- A PE of 15.1x times is palatable, peers in FCL and ALU sit on -92x and ALU 61.3x respectively.
- It has a gross yield of 2.1% which is below the market average of 3.8%
- 100% of the brokers surveyed by Thomson Reuters have a BUY or STRONG BUY recommendation
WHAT SORT OF INVESTMENT IS HSN?
You are buying into a company that derives its earnings from the utilities and telcos sectors, you are taking on part of the risk those sectors are exposed to, which is at the lower end of the investment risk spectrum. It is a business with long-term contracts with big utility providers, which equals stability.
Ord Minnett the only relevant commentary following HSN’s investor day, clearly buying into the presentation, considers the organic growth potential of the business is underestimated by the market, citing favourable dynamics in the global telco market – The internet of things and 5G. Target price of 600c implying an upside of ~8.5%.
Aside from the explosive period on March, HSN has largely been a sideways grinder. There is clear support at 520c and, so long as the price action holds above this point, the bullish momentum can be expected to continue, albeit at a slow pace – unless there are significant new contract wins.
The chart below shows HSN’s performance relative to the ASX 200 which it has only started to outperform from March.
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