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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