An Introduction to Hansen Technologies (ASX:HSN)… No margin of safety at current prices

Hansen Technologies (ASX:HSN) is quintessentially a provider of software solutions, and a family company. It was founded in 1971 and floated in 2000.  Profits have been falling since FY2012, but the company has responded by making two acquisitions. Supposedly, the focus on marketing and sales initiated in 2011 should start to yield results in the current period (2nd half of FY2013) and in the next financial year.

I sold my shares in HSN a few months ago, below today’s close at 92.5c (a market capitalization of $147.49 million) and I have been surprised at the demand for shares given that it is quite likely that the next dividend will be paid, in part, out of existing cash reserves (which have also been used to fund acquisitions). To me, it is a testament to the market appetite for dividends; although Hansen has maintained payment at 3c per half, the most recent dividend was only franked at 67%, rather than 100% as has been the case in the past.

Hansen Technology has a vested interest in encouraging the roll out of smart meter technology. Hansen stands to profit both from the management of smart meter data, and also the added layer of complexity required in billing smart meter customers. Hansen’s services are of fundamental importance to the transition to a more efficient energy distribution network, a fairer pricing of energy, and all the social benefits that arise from that.

Hansen acquires Irdeto and Utilisoft

In early January 2013, Hansen announced the purchase of the pay-tv billing and customer care product, Irdeto Customer Central (ICC) using the company’s cash reserves. They said that,

“After integration ICC is expected to represent 25% of Hansen’s total revenues. Initially the acquisition of ICC is expected to be marginally earnings accretive with the expectation that after a settling in period the EBITDA and cash return generated will steadily increase.”

The purchase is effective from January 1, 2013, and it is unknown exactly what contribution the company expects from ICC in the long term. I’m under the impression that the “marginally earnings accretive” acquisition would have a PE of 10 – 14. The company described the purchase as important to international expansion, and updated the market in February:

“We are now well into our second month of transitioning and integrating the ICC business and we are pleased with the progress to date. The justifications we had for this acquisition have so far been proven to be well founded. We continue to be very positive about the opportunities presented by the ICC business.”

In March 2013, Hansen announced the purchase of Utilisoft Australia, which includes “software solutions for real-time energy market interaction and transaction data management for generators, traders, retailers and other participants in the Australian energy market.” The acquisition is expected to add about $4 million of revenue, but the announcement did not claim it would be earnings accretive. Given that by this stage the new, lower, earnings had been reported, it is surprising the directors did not feel confident to claim it would be earnings accretive. I’d therefore have the impression that the purchase price PE for this business would be higher, perhaps around 15. Importantly, the acquisition brings in 15 new customers, to whom Hansen may be able to cross sell products.

In hindsight, management delivered on their previously stated goal of making acquisitions while the Australian Dollar remained strong.

Outlook for Hansen Technologies

In the latest report, for 1HY2013, Hansen announced a 46% dip in NPAT, and EPS of only 2.4cps (compared to 4.5cps in the pcp). Total NPAT for the half was $3.8 million (pcp, $7.1 million), which, if replicated exactly would imply $7.6 million for the full year, excluding acquisitions.

Assuming that both acquisitions contribute a return of 10% (which, in my view is not necessarily a safe assumption in their first year), and assuming that together they cost $20 million, then they would return $2 million in the first year. One full half would be contributed by ICC, and just a quarter for the (smaller) Utilisoft. This would imply the contribution from the acquisitions, to NPAT would be in the range of $750,000 – $1 million

The Half Year Report said that, the directors are “confident that the investment decisions we are making in personnel [and] offices around the world are well positioned and will deliver increased opportunities, improved performance and increased delivery capacity internationally.”

Assuming this flows to the bottom line in the second half (again, a potentially dangerous assumption), NPAT might be $4.6 million (assuming an second half improvement of over 20%). If the new acquisitions contribute $1 million, this would lead to a FY2013 result of $9.4 million. In my opinion, free cash flow could only cover the dividend payment by virtue of the dividend reinvestment plan (DRP).

On that subject, none of the directors chose to reinvest their dividend, and the Hansen family company, Othonna Pty Ltd, that owns over 56% of the company, also took its dividend in cash. The list of top 20 holders (from the last annual report) included Hansen family and the Rubino family (think Monadelphous, ASX:MND). I thought it interesting that fertility specialist Dr Penelope Foster sold her shares in FY2012.

Valuation of HSN

Even with the fairly dangerous/generous assumptions I’ve made, I value Hansen at no more that 91c per share based on improved performance in future years. I stand by my decision to sell the shares, as I think the risk outweighs the reward. However, Hansen remains on my watchlist because it achieves a consistently high return on equity, regularly returns cash to shareholders and management has a proven track record. At current prices, I do not perceive any margin of safety. At least the company has no debt.

The Author does not directly own shares in Hansen. At the time of writing the author thinks that he does have an indirect interest through August Investments

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Comments

2 Responses to “An Introduction to Hansen Technologies (ASX:HSN)… No margin of safety at current prices”
  1. Paul Middleton says:

    Hi Claude

    I’m wondering about your latest thoughts on Hansen post the FY13 result. This is what i posted on HC recently.

    FY14 is a pivotal year for Hanson as they integrate recent acquisitions. The company really needs to deliver in FY14 as they have been treading water for a number of years ie. their financial performance has been slipping, not their share price. My hunch is that the share price has moved higher since the Hansen family lightened up their holding by 23% in June this year.

    The outlook has brightened however, because HSN have guided for 1H14 revenue of $40m, and a similar 2H14 result. This 25% forecast rise in revenue for FY14 is the first significant rise in revenue since the 30% jump in FY2009. I suspect the weakening $A is a factor as more than 50% of income comes from offshore now.

    Yet can they convert this to the bottom line?? My analysis leads me to believe that HSN needs to deliver a profit of $13.7m in FY14 to equal the EPS of 8.6 cents the company achieved in FY11 (their best year). The company’s presentations seem to indicate a FY14 result of around $12m is anticipated, so EPS is still likely to be shy of HSN’s 2011 high watermark.

    The company continues to generate good op. cashflows, has no debt and pays a handy dividend. But I need to see that the extra spending on marketing / sales in 2013 that was highlighted by HSN becomes a catalyst for a sharp improvement in profit this year to remain a believer!

    Cheers
    Paul

    • I think we will see that improvement in profit, but I don’t find it to be particularly attractive at current prices. The good news for holders is that Hansen is a high quality business: one that I would have preferred not have sold.

      However, life being what it is, I have considerably more ideas than I have capital, and I sold Hansen (poor timing) to re-allocate the capital elsewhere. With the long history of dividends and the strong cashflow, I think it’s a fair decision to wait and see what they can achieve in the coming year.

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