HANSEN TECHNOLOGIES: RESEARCH TIP UPDATE

Utility billing software

The software company offers investors with growth potential and earnings resilience, a rare combination in today’s economic environment. The key is its Sigma acquisition, although this was not reflected in its most recent result, which included the costs of its recent acquisition, but not the benefits.

We view the acquisition as a case of one plus one equalling a great deal more than two. The very specific nature of the products, services and customer relationships acquired provide Hansen with much enhanced services to existing customers. However, cross selling is a long and involved process. Perhaps Hansen has an advantage as all its sales are long and involved, for customer relationship periods of over 10 years, and contract lengths of 5 years or more.

Hansen is forecasting FY20 EBIT of $76m, well up from FY19’s $55.8m, but it includes a full year’s contribution from Sigma (FY19 included just one month) putting the stock on an EV/EBIT ratio of around 11 times. Although the stock has run up nicely since our original Spec Buy recommendation in March, we think that this acquisition could be a substantial game changer, taking Hansen to another level of performance and eventually global growth, and we are therefore upgrading the stock.

For FY19 the EBITDA declined 7% on revenue up 0.2% at $231m. Without the single month contribution from the acquisition of Sigma, revenue would have been down 2%. Otherwise, results were in line with reduced expectations after a poor first half due to reduced project activity. It was the share price weakness triggered by the 1H19 shortfall that gave us our first buying opportunity in March.

The Sigma acquisition is the largest Hansen has made, so it will be important that management is able to extract the necessary synergies and potential cross selling opportunities. It is too early to tell whether the company will be successful with these endeavours, but management expressed confidence that the initial possibilities of introducing Sigma’s telecommunications and pay television catalogue services to its utility clients have been encouraging.

The Sigma product suite included catalogue, quote and order management, sales process management, inventory management, network activation and data analytics, and was purchased from a private equity firm.

**FY20 Forecast

RADAR RATING: The possibility exists that the recent Sigma acquisition will take Hansen to another level of performance and global growth, and we are therefore upgrading the stock. Liquidity is limited, so keep positions small and don’t overpay. SPEC BUY.