One month ago we researched Hansen Technologies (ASX:HSN). This followed the release of results for the six months to 31 December 2017 (1H18). At the time we noted that a number of positives had emerged. This was particularly pleasing after a period of under-performance in FY17. So, does this mean that share price weakness since early March now represents a buying opportunity?
An Overview of Hansen Technologies
Hansen Technologies (ASX:HSN) is a global provider of customer care, billing and data management systems for clients across four major industry sectors: telecommunications, energy, water and Pay television. Via acquisitions, the Company has expanded its operations within its core capability. The recent acquisitions strengthen HSN’s position in the US and UK markets. (PPL Solutions and HiAffinity in Financial Year 2017 (FY17)) and the Nordic market (Enoro). Following the acquisition of Enoro, the energy segment now accounts for 60% of overall revenue.
Organic Growth Rate Recovering
The significant step-down in the organic growth rate experienced in early 2017 was one of the key reasons for the under-performance in the share price in that year. Following strong organic growth rates of 10% in FY15 and FY16, the Company warned of weaker organic growth in 2H17. This later led to an earnings downgrade in July 2017. HSN’s organic growth in FY17 was estimated to have been ~2%. Given that the organic growth rate in 1H17 was +4.5% on a constant currency basis, this implies that organic growth in 2H17 was negative.
At the 1H18 results, the Company said organic growth (excluding the Enoro acquisition) was +4% on a constant currency basis and at the lower end of its targeted range of 4-8% growth. There is now a greater degree of confidence that HSN can deliver organic growth within the 4-8% target range in FY18. This is given that the Company has received several customer orders at the end of FY17. These orders will begin delivering revenue in FY18. Also, the Enoro acquisition is contributing a full year in FY18. This means that it is likely to generate incrementally higher growth than the rest of the business once integrated.
Enoro Acquisition Progressing Better Than Expectations
On 3 July 2017, HSN acquired Norwegian peer company Enoro for A$96m. Enoro supplies billing solutions, meter data management systems and analytics software to energy customers in the Nordic region. Enoro also has an expanding footprint in the European market.
Details on Enoro’s performance disclosed at the 1H18 results show that Enoro is performing better than expected. Revenue generated for 1H18 was ahead of the annualised run rate disclosed at the time of acquisition.
Balance Sheet On Path To Returning To Net Cash
Net debt as at 31 December 2017 was $17.2m. Gearing (on a net debt to equity basis) remains low, at 8.1%. Prior to the Enoro acquisition (which was funded with a $50m capital raising and an increase in net debt), the balance sheet was in a net cash position. It is likely that HSN will return to a net cash position in 1H19, especially as free cashflow remains strong. The return to a net cash balance sheet better positions the Company to participate in further Mergers & Acquisitions opportunities. The global market for customer care and billing software remains large and fragmented.
Is HSN Attractive at Current Levels?
We consider HSN to be a high-quality business with strong cash flow (underpinned by a recurring revenue profile), a sticky customer base and a strong track record in acquisitions. In particular making acquisitions that complement the Company’s core strategy and improving margins of the acquired businesses.
Notwithstanding these attractive fundamentals, the Company has a mixed recent track record in delivering organic growth. After a series of negative surprises (i.e. weaker organic growth in 2H17 that was unexpected, an earnings downgrade in July 2017 and weaker cashflow), the market is understandably reserved about the recent positive momentum. In particular, despite the sticky nature of HSN’s customer base, a recovery in the organic growth rate should treated with caution. This is because a material proportion of HSN’s revenue is from project-based work, which tends to be cyclical in nature. Further, given the periodic nature of IT CAPEX spend for corporates, it is likely that a year of strong growth (such as in FY17) will often be followed by a moderation in growth the following year.
In our last report, we noted that the stream of negative surprises last year warrants more caution. We considered lower levels to be a more attractive entry opportunity. The weakness in the share price since that time is more related to recent widespread volatility in the equity market and not Company-specific. This now brings HSN closer to a level where we would consider entering the stock. In particular, the de-rating in the 1-year forward P/E multiple, from ~20x at the time of our last report, to ~19x at present, is marginal.
The chart for Hansen Technologies
In 2016, the $4 mark proved to be a key support level and when that was broken the shares went on to fall another 20%. For much of 2017, that $4 level proved to be strong resistance. In late February we saw HSN break above that resistance level and it made a run up towards its old high. It now appears to be spending a few weeks congesting under the all time high. This is a positive sign. Short term price action indicates that we could get a retest of the breakout near $4. If it can dip back to $4 and hold, then that would be a potential opportunity to enter the trade. That should then lead to a rally in HSN towards an all-time high.
Michael Gable is managing director of Fairmont Equities.
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