Hansen’s Powercloud Ready To Perform

This story features HANSEN TECHNOLOGIES LIMITED, and other companies. For more info SHARE ANALYSIS: HSN

The company is included in ASX300, ALL-ORDS and ALL-TECH

After a negative reception initially, the powercloud acquisition is ready to start making a positive contribution to Hansen Technologies’ growth prospects.

-Moelis’ initiation of coverage adds another Buy rating for Hansen Technologies
-Potential for material near-term earnings growth for powercloud
-Management’s long history of capturing M&A synergies

By Mark Woodruff

Shares of Hansen Technologies ((HSN)), a global provider of software and services to the energy, water, and communications industries, have been on a rollercoaster ride since the acquisition of German software platform powercloud in mid-February last year.

While the acquisition expanded Hansen’s presence in key target markets, Germany and the broader DACH region (Germany, Austria, and Switzerland), the announcement initially triggered a sharp share price decline to near $4.00 from around $5.60, as the newly acquired business was generating significant earnings losses.

Given Hansen’s history of delivering immediately EPS-accretive acquisitions, investors felt they were caught off guard. At least, such is the explanation provided by analysts at Morgan Stanley.

As a more comfortable picture emerged for both Hansen and the newly acquired business, the share price recovered and then some, until Trump tariffs anxiety hit global markets from February onwards. 

The shares closed at $5.00 yesterday.

New research coverage

Moelis has freshly added Hansen Technologies to its local stock coverage. The initiation of research report labels the turnaround of powercloud as a meaningful near-term earnings growth opportunity, setting a 12-month target price of $6.00 and starting with a Buy rating.

The report highlights Hansen’s evolution from building solutions for Telstra Group ((TLS)) to developing its own proprietary software products, now marketed globally.

The Communications division provides complex systems to telcos and pay-TV providers/communications software providers (CSP’s) with software solutions helping deliver services to their customers.

In the Energy & Utilities division, Hansen provides Customer Information Systems (CIS) and Billing software solutions to numerous large electricity players and utilities across the globe.

Moelis points to a history of successful expansion over time, a currently stable management team, and geographically diverse operations, with no single customer accounting for more than 8% of revenue.

Creating opportunities for innovative new software services, these customers face changes around deregulation, decarbonisation, decentralisation, 5G transition, emerging producer-consumer (prosumer) customers, and the need to adapt systems for emerging technologies such as AI, explains the broker.

Like many software vendors, Hansen has minimal need for investment in fixed assets, with the majority of its asset base comprising acquired intangibles, such as technology and goodwill, and capitalised software development.

Moelis believes the current valuation for Hansen provides attractive upside potential and takes execution risks into account for ongoing development and enrichment of the product suite.

Necessitating this product improvement, competition is hot from large incumbents as well as startups offering differentiated functionality, explains the broker.

While the current share price does not imply a demanding growth outlook, in the analyst’s opinion, Hansen does face competition from large competitors wishing to retain market share (SAP, Oracle) as well as from challenger platforms.

The company has long established customer relationships, but emerging platforms such as Kraken, Tally, and Gentrack Group ((GTK)) have been successful in winning market share, highlights Moelis.

The complexity and diversity of energy regulations across differing geographies has supported the relatively large existing ecosystem of utilities software providers.

Acquisitions since 2019, the latest being powercloud

Uniquely, Hansen offers a differentiated investment case among Australian software stocks under Morgan Stanley’s coverage.

While the company attracts less investor attention due to modest organic revenue growth, the broker emphasises Hansen’s consistently strong earnings and free cash flow generation over an extended period.

In the analysts’ view, Hansen’s disciplined approach to bolt-on acquisitions represents a compelling “free option” for investors, underpinned by a decade-long record of effective execution.

Acquisitions have been integral to Hansen’s growth strategy.

The strategy by management, explains Moelis, is to capture synergies, while retaining alignment of software solutions to local regulatory requirements and client preferences.

In 2019, the company acquired Sigma Systems, a leading global provider of catalogue-driven software products for telecommunications, media, and technology companies.

Some notable additional acquisitions have been of companies servicing the electricity gas & water markets, including Peace, Nirvana, Utilisoft, Banner CIS, and, most recently, powercloud for -$49m.

Looking ahead, Moelis has incorporated a successful turnaround of powercloud into its forecasts, with the resulting cash flow recovery expected to support ongoing debt reduction.

Interim results in February

Interim results released in February proved in line with management’s guidance, with first half revenue rising by 6% on the prior year, while underlying earnings fell by -27%.

Year-to-date underlying earnings of $67m (after taking into account a January update) suggested management’s FY25 earnings guidance of between $92-101m should be largely de-risked, noted Goldman Sachs.

The strong January trading update reflected first revenue from the recent five-year contract win with Virgin Media Limited (VMO2) worth approximately $50m, noted Ord Minnett.

For this broker, the key highlight from interim results was the turnaround in powercloud.

Compared to previous guidance for a -$5m loss, restructuring efforts were accelerated to drive a likely positive earnings contribution in FY25.

Elsewhere, some minor delays were cited for new contract and project implementations, explained the broker, driving an overall unchanged guidance outlook.

Hansen’s FY24 profit included a -$10.2m loss via consolidation of five months of powercloud’s operations, which Moelis estimates reduced groupwide earnings margins by -4%. The February interim results showed powercloud lost a further -$7.3m.

Since acquiring powercloud, Hansen has reduced the headcount to circa 140 from 400 and cut -$31m from the cost base (annualised) while investing -$13m in working capital including restructuring costs.

Citing further room to lower mid-term costs, Goldman has confidence in management’s ability to lift powercloud margins toward circa 30%, when Hansen Technologies’ underlying earnings margin for the first half of FY25 was 21.4%.

Management remained confident organic revenue growth of between 5-7% is sustainable, driven by structural digital transformation tailwinds across both segments.

A fall in underlying revenue ex licence fees was due to customer implementation delays, noted Shaw and Partners, which management had been totally transparent about.

Outlook

Moelis believes powercloud achieving break-even provides an earnings tailwind for FY26.

Post interim results, Ord Minnett agreed, noting the accelerated restructuring work done on powercloud should underpin a strong earnings recovery in the second half of FY25 and FY26.

There are four daily covered brokers in the FNArena database researching Hansen Technologies with three Buy ratings and one Buy, High Risk from Shaw and Partners.

The average target price is $6.64, suggesting around 33% upside to the latest share price at the close of trade on March 31.

Outside of daily coverage, both Goldman Sachs and Moelis have Buy ratings with an average target of $6.05.

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