Hansen Technologies signs significant agreement with Telefonica and increases full year guidance
Hansen Technologies Limited (ASX: HSN) (“Hansen”), a leading global provider of software and services to the energy, water and communications industries, announces that it has executed a Master Agreement (the “Agreement”) with Telefónica Germany GmbH & Co. OHG (“Telefónica”) to licence via a prepaid subscription for Hansen’s Cloud Native Communications product suite to support Telefónica’s operations within Germany.
The Agreement is for a fixed initial term of five years with associated revenue of approximately $25m.
“We are delighted and very proud to be engaged with Telefónica. This agreement is testament to and a ringing endorsement of the Hansen Communication Suite and Hansen’s ability to continually evolve as a valued partner to our customers” said Andrew Hansen, Hansen’s Global Chief Executive Officer.
Increasing guidance provided at 1H21 results
Due to this strategically significant customer win we are upgrading our FY21 guidance:
• Revenues: $316m - $326m (constant currency), $306m - $316m (reported).
• Underlying EBITDA: margin 37% - 39%.
The resulting FY21 EBITDA margin is higher than our expected long-term margins of 32% - 35%. This is the direct result of all licence revenue ($21m) being recognised in 2H21 as is required under IFRS.
HSN Remserv to be one of those quiet achieving companies that are so boring no one seems find interesting. Their financial performance is also a bit difficult to interpret as they go through cyclical fluctuations. After acquiring a company all the metrics and debt look bad, then once it has been "Hansonised" which takes a year or two, everything starts to look rosy again.
the acquisitions are getting larger which magnifies this fluctuation.
most significantly, for me, is that margins have recently started to improve significantly (and see above announcement for further good news) and hence EPS have markedly increased (from a steady 8 or 9c to 15).
There is a lot to like:
it provides critical software services to utility type companies which are incredibly sticky
has high insider ownership
it sits on an undemanding multiple, pays regular dividends that have steadily increased over the years
Has a long runway for its growth model
and to date hasn't made a bad acquisition- its executive team act like long term owners, not management aiming for expansion fuelled bonuses
DISC: I hold in Super. Think it's perfect for a long term, boring but consistent 15% CAGR (actually 23%, but use 15 as a great metric to choose for these types of investments, like IFT)
Hansen has proven to be very reslient in the face of covid, as you would hope given the core role it plays for utility customers.
Revenue rose 30%, while EBITDA and NPATA were up 34% and 41% respectively. On a per share basis, earnings were 40% higher at 23.9c (on a NPATA basis, which excludes non-cash amortisation of acquired customer lists).
Hansen paid out 10c in dividends (including a 2c special dividend) in FY20. That represents a 46% payout ratio and puts it on a trailing 2.5% yield (exc. Special div).
The company also managed to pay down a chunk of debt, reducing the total by 23%. (Sigma was entirely debt funded)
Free cash flow was really strong at $44m, only just behind the reported NPATA of $47.4m, and almost 50% above FY19.
This big jump in profits was due to the acquisition of Sigma last year -- the biggest purchase in the company's history (being debt funded, there was no material increase in the share count). Organic revenue growth was only 2.9%.
Overall, these results came in slightly better than I expected (see previous Straws), and have underscored the quality of the business and management.
This is a company that is all about growth by acquisitions -- something that should normally make you nervous. But Hansen have been doing this for 20 years, creating significnat wealth for shareholders over that time and reinforcing a strong competitive position.
They are good at what they do.
Although organic growth is usually around single digit levels, the revenue generated is very reliable and high margin (16% net margin).
Over the past 5 years, per share earnings have compounded at an average annual rate of growth of 16% and i think low double digit growth is likely for the next 5 years.
Happy to continue holding this for many more years, with a view to accumulate more whenever the market worries over short term factors.
Results presentation is here
Hansen has provided a trading update.
It expects no material downturn for its customers that continue to provide essentail services.
for FY20, revenue is expected to be between $298-300 million, while EBITDA is expected to come in around $75-76 million.
This follows the withdrawal of guidance in early April. Back in February it was guiding for revenues of $300-305 million, with EBITDA of $72-77 million.
So it looks like the impact of COVID-19 has been relatively benign for Hansen.
You can read the announcement here
FY19 was weaker as forecast by the company, and with the substantial acquisition of Sigma contributing only 1 month's worth of earnings.
Overall, sales were essentially flat, or down 1.9% excluding Sigma. Nevertheless, recurring revenues were up modestly.
Underlying NPATA was 12.8% lower (Hansen traditionally ignores the amortisation charges of acquired intangibles, such as customer lists, which I think is reasonable given it's retention)
The expense base was flat, and are expected to reduce in the coming years thanks to the investment in the vietnam development centre.
Looking ahead, management said they expect revenue to grow by ~33% and EBITDA to grow by ~32% due to a full year contribution from Sigma. Accounting for new shares, and all else being equal, that should transalte into FY20 EPS of roughly 22cps.
Full ASX results presentation is here
Hansen today announced the acquisition of Canadian catalog software provider Sigma.
ASX Investor presentation is here
The purchase will be paid for in cash, will cost $166.2m and is being funded by a new $225m credit facility from RBC Capital markets.
The cost represents an EV/EBITDA multiple of 8.3 -- which is far from cheap for a privately held company, and only slightly below what Hansen itself trades for (it's on a EV/EBITDA of 9.1, using the trailing 12 months of EBITDA).
It was also purchased of a Private Equity company -- Birch Hill -- which has owned the business since 2015. And that's often a poor sign (PE companies seldom make any long term capital investments into businesses they run, and simply look to dress up the metrics and then flick to a new buyer...)
The strategic rationale is that it significantly expands Hansens exposure to the Telco industry -- more than doubling the proportion of revenue it derives from this sector. Moreover, Hansen reckon it will give them significant cross sell opportunities into its Energy and PayTV customer relationships. Sigma's product sits adjascent or withing Hansen's core billing and Customer management offerings.
The acquisition is expected to be EPS accretive -- excluding the amortisation of acquired intangibles (such as customer lists).
Hansen is extremely well practiced at making acquisitions -- its done loads of them -- but this is definitely a material purchase. Based on the trailing 12 months of operating earnings, Sigma should boost Hansen's EBITDA by ~28% (all else being equal).
So very positive from that standpoint. The risks, though, are that it will be difficult to integrate, will require a lot of investment, they dont achieve the cross sell benefits they expect, there could be writedowns to carrying value if the business underperforms.
The first half result was pretty ordinary in comparison to the previoius corresponding period, with Revenue down 5% and NPAT down 28%.
That being said, management had previously flagged a drop in the full year revenue and has still reiterated guidance.
Relative to the preceeding half (H2 2018) revenue was flat and profit up 18%. Thus the operating margin has improved half on half, from 22.7% to 25.3%.
Debt was further reduced, leaving the business with only $0.6m in net debt.
The market's reaction has been brutal, but I don't see any structural issues wth the business. Just a re-rate based on lower than expected growth, which isnt unreasonable. I'm also lowering my valuation.
As of Friday's close ($3.03), shares are on an PE of 17.8 and a yield of 2%.
Hansen is a software developer focused on billing solutions for utilities, energy and telco companies.
It has a long pedigree of delivering double digit sales and earnings growth, which has underpinned fantastic log term returns for sharehlolders.
Acquisitions have driven much of their growth, although these have been mostly value accretive for shareholders and they have achieved this with minimal debt and share issues.
Specifically, they have made 9 major acquisitions in the past decade, at a cost of $187m. That's funded by $76m in equity, $27m in debt and $84m in operating cash flow.
It's products are very sticky and scalable, with 65% of revenues recurring in nature.
It is led by Managing Director Andrew Hansen, the son of the founder, who has held the top job since 2000. He owns ~17% of all shares.
Hansen enjoys a lot of the attractive characteristics associated with software companies, and has a long track record of attractive shareholder returns.
FY19 saw a bit of a dip in profits -- which were well telegraphed -- but over the medium to longer term i expect upper single digit growth.
Given the nature of customers, and the tight integration of products, cash flows should be very reliable. Moreover, Hansen is little exposed to the domestic economy.
Management have a lot of shares and are welll aligned.
A great stock for the bottom drawer.