Thursday, July 4th, 2019
In early June, Hansen Technologies (ASX:HSN) completed an A$166m acquisition of Canada-based Sigma Systems. This was HSN’s largest acquisition to date, funded via a new A$225m facility.
We initially included HSN in the Clime Direct Model Portfolio because it was undervalued at ~15 times FY20 earnings, and its net cash balance sheet provided plenty of room for further acquisitions.
HSN’s billing software is a ‘mission critical’ part of its utilities, telco and pay-TV customers’ operations. The software ensures millions of end customer receive accurate and timely bills and enables various permutations of billing arrangements, which is important for staying competitive in de-regulated markets.
Due to the mission-critical nature of billing software, switching costs are high and therefore organic growth is hard to come by. Almost all of HSN’s growth over the last two decades has come from acquisitions.
Inclusive of the first full year contribution by Sigma, HSN annualised earnings per share (EPS) growth from FY15 to FY20 comes to 22%. This was achieved concurrently with disciplined balance sheet management.
Sigma is a global leading enterprise catalogue-driven software to the telco and media sectors. This software assists with managing product creation and offers, which is complex given the product permutations required to personalise and tailor offerings to various customers.
Figure 1. Sigma customer base
Source: HSN Presentation
Its offering sits adjacent to HSN’s core billing and customer management software, and expands HSN’s scale and scope into telco sector, increasing diversification outside HSN’s traditional strength in utilities.
Sigma’s FY18 revenues were A$75.5m (about a third of HSN’s pre-existing business) at a healthy 26% EBITDA margin. HSN’s management believes there are revenues synergies to be extracted from cross-selling.
Our preliminary valuation will be updated on further information around organic growth expectations for the new business.
Clime Group owns shares in HSN.