Hansen: Interim result 2016

When we initially upgraded Hansen Technologies on 29 Oct 14 (Buy – $1.52), we thought the company had decent growth prospects: 'Assuming annual organic growth of 5–7% over the long term, with room for cluey acquisitions to add to that, total annual returns could comfortably surpass 10% a year'.

We were well off the mark. In the sixteen months since then, revenue and net profit have risen 65% and the share price has more than doubled.

Hansen's latest interim result was exceptional. Revenue rose 50% to $74m compared to the prior corresponding period thanks to strong organic growth and the May 2015 acquisition of Denmark-based TeleBilling, a developer of customised billing and customer relationship management (CRM) software (see Hansen takes on Europe).

Management said there were no hiccups integrating the business and that it 'continues to deliver opportunities' in the Northern European telecommunications industry.

'We have also seen double digit organic growth on a constant currency basis in our core billing business as we delivered on new customer projects as well as product enhancements from within the existing customer base. Hansen continues to invest in its people and its products delivering new opportunities in India in the Pay TV market and in Japan in the Retail Energy sector' said chief executive Andrew Hansen.

Operating earnings

Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 'only' 40%. Hansen's operating margin contracted from 32% to 30% due to TeleBilling running on lower margins. Management, however, has a knack for cutting costs and finding savings in the years following an acquisition so we wouldn't be surprised if Hansen's operating margin shows some improvement over the next year. Earnings per share increased 31% to 7.1 cents, which is lower than net profit growth due to the $25m capital raising used to make the TeleBilling purchase.

Because Hansen earns more than two thirds of its revenue in foreign currencies, yet incurs a significant proportion of its cost in Aussie dollars, it has benefited from the declining Aussie dollar.

However, costs are increasingly aligned with its revenue currencies – especially since the TeleBilling acquisition, which became a new European headquarters. Management noted that the impact of currencies on its margins is declining.

All things considered, we prefer businesses to have aligned costs and revenues as it makes for more stable earnings by removing the effect of currency fluctuations. We were also pleased to see that Hansen used part of the $15.8m of free cash flow it generated over the past six months to pay off its $10m of debt, so the company's balance sheet is now as clean as they come.

Management expect the revenue and EBITDA achieved in this result will 'broadly be replicated in the second half of the year provided favourable trading terms are maintained'. If that were the case, Hansen could expect to have around $44m in EBITDA in 2016, a 69% increase on 2015.

This will undoubtedly be a year to remember. However, as we mentioned in the last review, it's only reasonable to expect organic growth of 5–7%. Hansen is more akin to a utility than a high-powered tech stock and we don't expect the bumper growth of this past year to be repeated in 2017.

The share price has risen 8% since Hansen increases earnings outlook from 18 Dec 15 (Hold – $3.07), putting the stock on a forward price-earnings ratio of around 23 and a free cash flow yield of 5.3%. With captive customers, no debt, highly capable management, annuity-style revenues and decent growth prospects, we continue to recommend you 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.