AI Investments, Powercloud Turnaround, And Virgin Media O2 Deal Will Strengthen Future Prospects

Key Takeaways

• Successful Powercloud restructuring strengthens financial stability and boosts net margins, indicating a promising financial outlook.
  
• Strategic AI investments and strong pipelines in communications ensure sustained growth and enhanced competitive positioning across various verticals.
  
• Delays in project upgrades and a high tax rate present challenges, alongside revenue decline and cash flow issues affecting Hansen Technologies' financial stability.

Catalysts

Engages in the development, integration, and support of billing systems software for the energy, utilities, communications, and media sectors.

• Hansen Technologies expects significant growth in the second half of FY '25 due to the timing of license renewals and significant upgrades and implementations that have been locked in, implying revenue and EBITDA growth, with second-half revenue expected to exceed $200 million.
  
• The Powercloud turnaround has been a success, with the business now being cash-generative after restructuring. This strengthens financial stability and could have positive implications for net margins moving forward.
  
• A new $50 million multiyear deal with Virgin Media O2 exemplifies Hansen's strong pipeline, particularly in the communications sector, which will contribute to sustained revenue and earnings growth.
  
• Hansen's investment in AI, particularly through a strategic stake in Dial AI, is expected to drive future efficiencies in call center operations, potentially increasing net margins through cost reductions and improved customer satisfaction.
  
• Hansen's focus on R&D and transitioning to AI-driven solutions is likely to enhance its competitive positioning, supporting long-term revenue growth by attracting new clients and expanding applications of their software across different verticals.

Hansen Technologies Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Hansen Technologies's revenue will grow by 7.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 1.0% today to 12.4% in 3 years time.
• Analysts expect earnings to reach A$55.3 million (and earnings per share of A$0.27) by about April 2028, up from A$3.5 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting A$63.4 million in earnings, and the most bearish expecting A$39.8 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 28.3x on those 2028 earnings, down from 291.8x today. This future PE is lower than the current PE for the AU Software industry at 61.5x.
• Analysts expect the number of shares outstanding to grow by 0.1% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.78%, as per the Simply Wall St company report.

Hansen Technologies Future Earnings Per Share Growth

Risks

• The company's core business revenue is down 14.8% in the first half, which could affect overall revenue performance if the trend continues.
  
• Despite plans for future revenue, the implementation and upgrades for significant projects have been delayed, some even shifting to FY26, which could impact revenue and earnings forecasts.
  
• The effective tax rate at 98% due to Powercloud's tax loss situation in Germany is significantly higher than the usual 24-26%, potentially impacting net margins.
  
• The financials reveal a cash flow challenge in the first half, indicating potential liquidity risks that might affect operational capabilities.
  
• The unpredictability of license revenue recognition under accounting standards creates volatility, which can lead to fluctuating earnings and difficulty in forecasting profitability.

Valuation

• The analysts have a consensus price target of A$6.156 for Hansen Technologies based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of A$7.2, and the most bearish reporting a price target of just A$4.2.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$444.8 million, earnings will come to A$55.3 million, and it would be trading on a PE ratio of 28.3x, assuming you use a discount rate of 7.8%.
• Given the current share price of A$5.04, the analyst price target of A$6.16 is 18.1% higher.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.