The S&P ASX/200 (ASX: XJO) is skirting multi-year highs again this afternoon with a lot of its fastest-growing or most popular businesses on nosebleed valuations that could unravel quickly if investor expectations are not met when companies hand in their profit reports next month. For example the likes of WiseTech Global Ltd (ASX: WTC) and Appen Ltd (ASX: APX) will need to impress in order to justify the prices investors are paying today for future cash flows. However, if you look hard enough there’s nearly always a strong business on a decent valuation somewhere that may offer superior returns even if…
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The S&P ASX/200 (ASX: XJO) is skirting multi-year highs again this afternoon with a lot of its fastest-growing or most popular businesses on nosebleed valuations that could unravel quickly if investor expectations are not met when companies hand in their profit reports next month.
However, if you look hard enough there’s nearly always a strong business on a decent valuation somewhere that may offer superior returns even if underlying growth rates are not as strong. This is because investment returns are always a function of price paid.
Software billing and information systems business Hansen Technologies Limited (ASX: HSN) recently disappointed the market with a soft trading update in guiding for flat revenues in FY 2019 and its share price dropped more than 20% as a result.
However, the price fall may provide an opportunity for investors to buy a high-quality business on a reasonable valuation.
Below I outline five reasons why.
Founder led – Hansen has been led by its founder’s son, Andrew Hansen, for over 16 years and he reportedly owns more than 20% of the shares. As an investor you can’t ask for a management team to have much more alignment than their family name on the front door.
Defensive revenue streams – As a billing software business Hansen’s revenue streams are generally recurring in nature as clients pay for the services on a regular basis. The complexity of billing software and its critical nature to utility businesses for example also means it is quite sticky in nature. In other words clients are unlikely to undertake the hassle and risk of switching providers, unless they’re deeply unhappy with the service or believe a competitor offers a genuinely better service.
High margins – Hansen’s enterprise software business model means it operates on high margins as once the initial services are provided ongoing costs are relatively limited. It’s also scalable in that new clients can be served with relatively little extra cost. In FY 2018 it expects to earn an EBITDA margin around 25%.
Growth – the group is forecasting a flat FY 2019 as it beds down a series of recent acquisitions and much of its growth historically has come via acquisitions. Its management team appears experienced and competent in executing this strategy with operating revenue and earnings per share expected to come in 30% and 24% higher respectively in FY 2018. Despite the acquisitive growth net debt stood at just $17.2 million at December 2017. This is minimal at less than one third of FY 2018’s expected EBITDA of $58 million.
Value – The stock sells for $3.09 this afternoon on a market value of $604 million or 10.4x expected EBITDA. For a business with minimal debt and a large amount of recurring revenues on high-profit margins this looks good value. A 1.9% trailing yield plus full franking credits is an added bonus especially given my expectations Hansen will be able to grow dividends nicely over the medium term.
However, to be fair the really big returns in the share market are made by buying the Hansen of tomorrow, not today…
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You can find Tom on Twitter @tommyr345
he Motley Fool Australia owns shares of Appen Ltd, Hansen Technologies, and WiseTech Global. 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 Scott Phillips.