Hansen: Interim result 2018

When we initially upgraded Hansen Technologies, it offered an attractive yield of 3.9% – with a dividend we thought was near certain to grow over time.

It hasn't. Management has kept the dividend constant at 6.0 cents a year despite earnings per share growing by more than 60% since 2014. Rather than pay a higher dividend as profits have grown, management has reduced the payout ratio from around 60% to just 34%. While our expectations were off, though, the result is better for shareholders.

Imagine that Hansen is a builder renting a single-storey townhouse from you. He starts off paying you a rental yield of 3.9% and suggests that instead of that rent increasing each year, he'll make improvements to the property. 

After a few years, your rental income may not have grown, but you might own a three-story residence, with a large deck and a pool. So long as your tenant can keep adding value to the property, then you'll be more than happy for him to do so; and when it reaches its natural limits, you'll be able to revert to a more usual tenancy agreement and charge a much higher rent.

So long as Hansen can keep reinvesting its profits into growing its business at high rates of return – the company had a return on equity of 16% in the year to December – we're happy to forgo the dividend growth. We're confident that patience will be rewarded.

Hansen's latest interim result was another strong one. Revenue rose 36% to $118m compared to the prior corresponding period thanks to organic growth of 4% and the recent acquisition of Enoro, a Norweigan developer of customer information systems (CIS) and metre data management (MDM) software for utility companies (see Hansen: pining for the fjords). Management said that Enoro had performed ahead of expectations and that its integration is progressing well.

Margins increasing

Earnings before interest, tax, depreciation and amortisation (EBITDA) rose 41% to $33.8m. Hansen's operating margin increased from 28% to 29% – an impressive feat considering that Enoro operates on a lower EBITDA margin of 16%, so should have dragged this figure down.

Management said the increase was driven by cost-cutting in non-staff-related expenditure, productivity gains and the deferral of some investment. Management has a knack for cutting costs and finding savings in the years following an acquisition so, everything else being equal, we wouldn't be surprised if Hansen's operating margin further improves next year.

Underlying net profit rose 47% to $22.7m, while earnings per share rose at a slightly lower rate – 37% to 11.7 cents – due to the Enoro-related equity raising.

The bumper profit growth was aided by some tax tailwinds: increased research allowances in the US, dilution from Enoro thanks to a lower corporate tax rate in Norway, and a reduction of US corporate taxes from 35% to 28% (which will fall to 21% in 2019). Overall, Hansen's effective tax rate fell from 27% to 23%.

Free cash flow

Free cash flow almost doubled, rising from $11.5m to $20.5m, mainly due to customers paying for services upfront and lower capital expenditure. Management used the extra cash flow to pay off debt: net debt fell from $31.8m to $17.2m.

Management expects revenue to decline slightly in the second half of the financial year as some one-off project revenue in this past half won't be repeated. Management expects EBITDA for the full-year to be ‘around the mid-point of our target range of 25–30%'.

Hansen has a clean balance sheet, captive customers, recurring revenues and decent growth prospects. This was another good result and shows off management's talent for building the business both organically and through acquisition. The stock currently trades on a forward price-earnings ratio of around 18 and free cash flow yield of 5%. We're notching up the price guide and continue to recommend you HOLD.

Note: The Intelligent Investor Equity Growth Portfolio and the InvestSMART Small Companies Fund own 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.