Micro Cap Rising Stars – Hansen Technologies

This story features HANSEN TECHNOLOGIES LIMITED. For more info SHARE ANALYSIS: HSN

By Greg Peel

Microequities is an Australian financial adviser specialising in in-depth research of listed “micro caps” – those companies of low capitalisation too small to register on ASX indices or to attract research coverage from leading stockbrokers. In June Microequities hosted its Rising Stars conference, at which selected companies presented their wares. FNArena was invited to attend, and over a period of time will provide conference highlights. This is the second.

Hansen Technologies’ ((HSN)) CFO Grant Lister proved to be surprisingly dry-witted and entertaining for an accountant. In a sense he was a metaphor for his company – admitting that as his presentation followed that of a company doing innovative things realm of new generation mobile phones, the audience should now be prepared for something a bit more dour. However, it soon became apparent that Hansen’s business is not the least bit humdrum.

In order to appreciate what Hansen does, and why it has plenty of upside potential, consider a few points.

Australia has actually led the world – believe it or not – in the process of utility deregulation. Yes – despite all the hullabaloo presently surrounding the NSW government’s plans to privatise electricity production in the state, and the fact those plans may be scuppered by yet another inane scandal amongst the ranks, Australia is even ahead of the US on deregulation and privatisation in this industry. Victoria has been the pioneer, and every other Australian state has fallen into line, except NSW to date.

You may have noticed in Australia that your electricity provider is also now offering gas, and your gas provider is offering electricity. If you live in the UK, you perhaps use the services of Britain’s biggest telco service provider – Tesco supermarkets.

You can also choose to pay extra for a proportion of renewable energy to be accredited to your quarterly bill. You can also choose to receive a bill monthly. You may also be aware that off-peak electricity costs, for example, are different to peak.

In the case of the latter, you may also be aware that electronic home utility monitoring systems are becoming popular, which are devices whereby a family can keep a tighter rein on where its members are soaking up power unnecessarily. You may not be aware that such devices are gaining in intelligence, such that newer whizz-bang devices can turn a light off after a wasteful teenager, or perhaps turn off the fridge for a while in off-peak periods when it is cold enough.

You may also not be aware that new homes built in Australia no longer allow for old-style whirling-wheel meters of limited flexibility that require a serviceman to come and take a reading. They must now be digital units, which can be measured from a central point. New units are taking measurements up to 4,400 times a quarter, instead of once.

When you consider such innovations, you can begin to understand why the process of utility billing has become highly complex, and will only become more so. Across the globe utility industries are deregulating, then rationalising, then attracting new players, then adopting new technology. Producers have become separate entities from distributors. Tax considerations are changing. It has reached the point where flexible and up-to-the-minute billing process technology is a must-have. Every time a utility comes up with a new marketing ploy, a new billing system is required. And shortly environmental regulations and/or cap and trade schemes will only add to the complexity.

That’s where Hansen comes in.

As an example, Scottish Power spent four years contemplating a new comprehensive billing system and then spent another four years installing its new Hansen product, and in so doing progressively switched off the eight separate billing systems the company had been forced to have running. Australia’s AGL, as another example, currently has 26 different billing systems in order to produce one household bill.

Beginning with a HUB (Hansen utility billing) system, Hansen purpose-builds requisite software for its customers utilising primarily Unix platforms and Oracle database management systems. Products are not “shrink-wrapped”, but specific to each customer. Notes Lister, “There are currently more changes happening in the world than companies or people who can handle the billing”.

Hansen’s big-boy competition includes IBM, SAP and Oracle. However, the smaller Hansen has the capacity to be more nimble and flexible than the big operators. The company has policy of customers being able to make only one phone call to their billing services provider to sort out any queries, and a human will answer. It will be the CEO, if requested. Hansen’s smaller independent competitors are beginning to drop off.

Hansen was founded in 1971 and listed on the ASX in 2000. However, shortly after listing the company realised it had made one significant error. Focussing initially on telcos, Hansen allowed itself to become 30% exposed to one single – albeit large – customer. So when WorldCom went under, Hansen’s life hung in the balance as well. Indeed, in 2000 only three customers made up 60% of Hansen’s business.

The company learnt quickly from this experience, and today no one customer represents more than 8%. Hansen also expanded from telcos into energy, which was both a move with the times and a nod to industry diversification. Energy now dominates, but the telcos are fighting back once more as well. Hansen also expanded its geographical footprint into the UK and Japan.

An important factor in the Hansen business model is that the company looks to create annuity streams from its customers, rather than accept one-off payments. Thus rather than expecting a customer to purchase a software licence, Hansen will provide a software licence in exchange for an agreed percentage of billing. Customers are then locked in and Hansen’s cash flow is smoothed, but Hansen also becomes a de facto investor in that company’s success.

Across the globe is also a developing pattern of wholesalers being separated from retailers, and retailers not wishing to access only the one wholesaler. There are also, for example, many different companies making different types of metering systems. Hansen’s software can be adapted to all eventualities, and the more the market trends in this direction the more billing points are established and thus the more Hansen’s capabilities are required.

Last year Hansen sold an outsourcing business which was not core to its business model (and a tough game to boot). It retains a hosting service, although that is now a lesser part of its operations. In FY08 Hansen expects to book $41m in turnover, which is down $10m from FY07 given the sale of the non-core business but up $7m otherwise. EBITDA should be $20m (including $8.8m for that sale). Operating EBITDA of $11m is up 30% on FY07 and rates as 28% of revenue. Industry standard expectation is for 20%.

Hansen paid a 4c unfranked dividend at the interim, but future dividends should be fully franked. There will also be a 2c capital return after June. The company has $20m (13cps) in cash and had no debt – not even a lease. Customers to date include EnergyAustralia, Telstra, AAPT, Alinta, Energex, Scottish Power and Tesco, to name a few.

The shares traded recently at 37c for a market cap of $56m.

Just as a last teaser, consider this planned innovation from Hansen in telco billing: Currently you pay your family’s phone bill on a contract/plan basis. You give your children each a mobile phone and a pay-ahead phone card which you will refill on a predetermined basis. You have no idea who they call. On Hansen’ new system you will be able to pay your arrears contract and your children’s pay-ahead which will be automatically added to your own bill on a scheme you decide – all on the same bill. You will get a list of all calls on all phones.

As technology itself moves exponentially on, billing also becomes an issue in need of innovation.

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