Mar
8
Written by:
David Press
3/8/2011 4:10 PM

Having made my way through a number of half yearly reports in recent weeks, Hansen Technologies Ltd's (
HSN-ASX) performance is a real stand out and sets the company up for a fantastic full year result.
I discussed Hansen in the latter part of 2010 (
blog here) and formed the opinion that the company looked to be trading at a slight discount to it's intrinsic value. Having continued my research into the roll out of smart meters in the US and the technology required, I felt that due to Hansen's product and service offerings and market position in the US (particularly after the NirvanaSoft acquisition), the company was poised for strong growth in coming years. With an exceptionally strong balance sheet and apparently very capable management team, I took my first position in HSN in the low to mid 70c range.
Luckily for me my decision to buy was made only a few trading days before Hansen's management announced a large performance upgrade for the first half of FY2011. The timing was pure luck, but without doubt the performance upgrade provides me with further evidence of the management teams ability to drive strong share holder returns, not to mention a tidy paper profit already!
On the back of a slight reduction in revenue (down 4%), HSN have managed to lower costs and increase efficiencies resulting in a 27% increase in EBITDA to $10.078m and a 53% increase in NPAT to $6.913m for the half. Given at the beginning of the financial year, management expected growth of around 5-10% for the full year, I think it's almost needless to say that the first half result in nothing short of exceptional. In the half yearly report and the original upgrade guidance, management make note that revenues were down due to a shift in business to overseas markets and a resultant negative effect on revenues, due to a strong Australian dollar. However, with a large percentage of costs also being derived in foreign currency, costs also dropped. Coupled together with an increase in efficiencies and cost reductions, Hansen have been able to substantially increase the bottom line result.
Having made the NirvanaSoft acquisition in the first half, Hansen didn't waste time in developing further business relationships in the US with the formation of a strategic alliance with Milestone Software Solutions (MSS). The collaboration results in Hansen providing the modern complex software solutions required and MSS providing their smart meter strategy expertise, delivery of solutions and application maintenance to customers. This alliance will provide Hansen Technologies an entry into the complex CIS and Billing management software market through MSS's existing client base. I look forward to watching how well Hansen are able to leverage off the acquisition of NirvanaSoft and gain market share in this lucrative market.
As well as growing the offshore business, Hansen also made investments in their Melbourne office and are now providing 'cloud computing services'. With many businesses around the world looking to cloud computing and outsourced IT services, it appears HSN are looking to positions themselves in this growing market and are aiming for growth in this area in the second half.
Additionally in the second half, management state they are targeting further efficiencies in their software development processes and further integration of their businesses in the US. Research and development in their electricity smart grid initiatives is not surprisingly also included in their objectives for the second half.
Of most interest to me however, is their continued interest in the investigation and review of complimentary and compatible businesses with a view to acquisition. Given Hansen's strong balance sheet, with cash on hand at just under $20m, the company is very well positioned to continue it's growth by acquisition strategy. To date management have shown a propensity for making smart and well priced acquisitions (NirvanaSoft was purchased for just under $3m), and I feel that further well considered acquisitions will provide potential for larger market shares in existing target markets and potential for large increases in revenues and profits in the future. The management's careful approach to how much they pay for their acquisitions should ensure the company maintains it's high return on equity for a number of years to come.
At it's current share price (95cps) and after a recent increase in interim dividends, HSN yields around 6.32% partially franked. We expect continued high returns on equity and I expect intrinsic valuations to come in at well over the $1 per share. Hansen's position in high growth markets, ownership of full service and complex software solutions and a fantastic balance sheet make them one of my top stocks to watch in coming years and should be on the watch lists of any intelligent long term investor.
Disclaimer: My position in HSN is indirect. I am not a professional investment advisor and do not hold the required licenses. No investment decisions should be made based on the information above. Always seek the advice of professional investment advisors before making any investment decision.