Hansen increases earnings outlook

Hansen Technologies' share price has jumped 13% after the company announced a better than expected first half to the financial year and an improved outlook. Management initially expected revenue of $135m in 2016; however, it now believes the billing software maker will earn $72–74m in the six months to 31 December, nearly 50% higher than the same period last year.

What's more, operating margins are now expected to be 'at the top end' of the company's target range of 25–30%. 'If trading conditions remain favourable we would expect to broadly replicate these results in the second half of this financial year,' said chief executive Andrew Hansen. If that were the case, Hansen could expect to have around $42m in earnings before interest, tax, depreciation and amortisation (EBITDA) in 2016, a 61% increase on 2015.

Hansen has proven itself on many occasions to be a strong operator and has some decent competitive advantages thanks to high switching costs preventing its utility customers from easily switching providers.

Furthermore, Hansen and smaller competitor Gentrack are both likely to benefit from a worldwide trend towards privatising and deregulating utilities (see Gentrack: the captor, the spoils). Privatisation and deregulation tend to encourage more price points and product variety, which will force many utilities to upgrade their outdated internally developed systems. A more competitive retail environment requires flexible billing software capable of higher data loads – the specialty of Hansen and Gentrack.

Raising price guide

We're increasing our recommended Buy price from $1.70 to $2.20 and raising our Sell price from $3.00 to $4.50 to reflect the growing business and a more positive outlook.

It's worth noting that at $4.50, Hansen would have a market cap approaching $800m and a price-earnings ratio of around 30. Undoubtedly, that's a steep price, even for a high-quality company.

It's only reasonable to expect annual organic growth of 5–7% over the long term, or slightly higher given a few more cluey acquisitions (Hansen has a knack for them). At $4.50, total annual returns would probably only reach the mid to high single digits, so – depending on what other opportunities you have on your plate – you may want to gradually sell on the way up.

Nonetheless, Hansen has a lot going for it: decent competitive advantages, shareholder friendly management, a spotless balance sheet, recurring revenues, steady organic growth and the prospect of favourable acquisitions. We don't want to let go of Hansen too easily.

The share price is up 15% since Hansen: Result 2015 from 27 Aug 15 (Hold – $2.67) and has more than doubled since Hansen upgraded to Buy from 29 Oct 14 (Buy – $1.52). HOLD.

Note: The Intelligent Investor Growth portfolio owns shares in Hansen Technologies. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in Hansen Technologies.