In a series of articles, I will take a look at the history of some of the ASX’s best-performing stocks. In particular, I will attempt to answer the following questions.

  1. What did these companies look like at the start of their rise?
  2. Is it possible to identify tomorrow’s 10 baggers?

Hansen Technologies Limited (ASX: HSN) provides customer care and billing software to telco, pay TV, utility and water companies. If you had bought $10,000 of shares in Hansen 10 years ago, they would be worth almost $260,000 today, plus you would have received $30,000 in dividends and capital returns over the period.

Back in August 2006, Hansen had a market capitalisation of just $23.9 million. The company provided billing software to the utilities and telecoms industries through its HUB product and also offered outsourcing IT services to the financial industry.

Hidden value

Hansen was yet to report its full year result for 2006, but the half year report was not pretty. Revenues were down 15% to $24.3 million and the $266,000 profit before tax (PBT) in the prior period had swung to a loss of $1.3 million. Similarly, operating cash flows were negative and the company had spent $2.1 million on software development which it had capitalised rather than expensed.

Perhaps the only positive in the result was the balance sheet which showed $2 million in cash after adjusting for debt thanks to a receipt of $6.4 million from a share issue during the period. It is safe to say that I would not have bought shares in Hansen back in August 2006 based on its most recent set of accounts.

However, there were signs that things were turning around for Hansen. The half year report was accompanied by a press release explaining that the company’s poor performance was due to upfront costs related to implementing its software for new key global clients. These clients would generate long-term recurring revenues for little cost once the implementations had been completed.

Catalyst

In 2006, countries in Europe and Asia were deregulating their utilities industries which opened up new markets for customer billing software. Australia had already undergone similar changes and so Hansen was in a strong position to take advantage of this one-off opportunity.

International competitors would have to build new software from scratch to address the needs of customers, whereas Hansen could quickly adapt its HUB software to suit these markets. Speed to market was a significant advantage because customers were likely to stick with software once it had been implemented due to high switching costs.

Trustworthy management

Andrew Hansen was the Managing Director of Hansen in August 2006 and he still leads the company today. Back then, he owned 7.6% of the business and had recently contributed $300,000 in a rights issue in September 2005.

At the time, management communicated well with shareholders. For example, they clearly articulated the reasons for the disappointing result in the first half of 2006 and laid out a clear path for the company’s future.

Sound business model

Billing software is deeply embedded in clients’ workflows and so customer churn is very low. This is particularly true of large bureaucratic utility companies that are resilient to change and are very unlikely to go out of business. Therefore, each implementation can deliver many years of revenues for very little ongoing cost.

Hansen was barely able to keep afloat back in 2006, but the strength of its business model was plain to see. Once the company achieved greater scale through geographical diversification, profit margins improved and its share price followed.

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Motley Fool contributor Matt Brazier has no position in any stocks mentioned. The Motley Fool Australia owns shares of Hansen Technologies. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.