Software is one of the more interesting mini sectors of the ASX, and here are two of the most impressive businesses of that group. Both have similar businesses, based around developing and selling billing software to utilities, but each has very attractive specialisations.
Here’s the rundown on two of our software stars.
1. Hansen Technologies Limited (HSN, $5.08)
Market capitalisation: $1 billion
12-months total return: 4.7%
Three-year total return: 9.9% a year
Estimated FY25 yield: 2.2%, 15% franked (grossed-up, 2.3%)
Estimated FY25 price/earnings ratio: 16.9 times earnings
Analysts’ consensus price target: $6.35 (Stock Doctor/Refinitiv, eight analysts)
It’s hard to find a box that Hansen Technologies doesn’t tick.
Hansen says its business is built on a simple mission – to empower utility services providers everywhere on their digital transformation journey and helping them respond to the needs of the modern consumer. It provides billing software solutions to customers in the energy, gas, water, and communications industries, in more than 80 countries.
The Hansen strategy, since founding in 1971 and listing on the Australian Securities Exchange (ASX) in 2000, has been simple. It owns the intellectual property (IP), the implementation and the pricing power; it has a very low customer churn, and it strives to not give its customers a reason to leave. And its global diversification ensures that it does not depend on one product, client, currency, industry, or geography. No one customer represents more than 7% of Hansen’s revenue. Just over 52% of revenue comes from The Energy business (gas, electricity, and water), with the remainder coming from communications. Its balance sheet is now net cash, with no net debt; in fact, at the full-year FY23 result it was sitting on $300 million that it could deploy into acquisitions.
Oh, and it’s a prime example of a “founder-led” company; where the presence of a founder or founding family on the management team shows investors that they have as a co-investor a founder/business leader that has their family’s wealth on the line. Kenneth Hansen started the business 53 years ago: son Andrew Hansen has been with the business since 1990 and only stepped down as CEO in June last year (he is still managing director, focusing on strategic growth.) The Hansen family owns 17.5 per cent of the company, which is valued at just over $1 billion.
Hansen is a very consistent long-term performer. Revenue tends to grow consistently each year, net profit usually rises as well, and return on equity (ROE) is robust, at 17.1% for FY23. The company pays a fully franked dividend.
The software products that Hansen develops, and sells are vital to the efficiency of its utilities and communications customers: it is the type of service that has “high switching costs, meaning it is hard to change providers. In the latest full-year result, customer churn was a minuscule 2%.
In FY23, revenue rose by 5% to beat consensus, at a record $311 million. Second-half revenue growth was the main driver, at 9%, as the move to renewables and solar panels drove increased demand for HSN’s products and services across the Energy business. Net profit lifted 2.1%, to $42.8 million. The company gave FY24 guidance for organic growth of 5%—7%, which was above expectations.
Hansen has made a lot of acquisitions over the journey and is still prepared to buy the right business to add-on: it says it has identified a list of target opportunities in the $30 million to $500 million range, that will boost the organic growth profile.
Going forward, Hansen is one ASX company for which artificial intelligence (AI) could be most transformative. The company says it has been building capabilities to harness AI and machine learning within its business, and it expects to see “compounding productivity gains” from its utilisation of AI. Hansen believes AI will “kick-start another cycle (similar to digital transformation), where customer demand for and expectation of AI innovation will drive our future R&D focus.” Hansen is actively piloting AI capabilities that integrate with its existing ecosystem, and it anticipates these initiatives to start delivering business benefits during FY24.
HSN has a great track record, and analysts see a total return of more than 25% from these share price levels.
2. Gentrack Limited (GTK, $6.77)
Market capitalisation: $699 million
12-months total return: 166.5%
Three-year total return: 68.7% a year
Estimated FY25 yield: n/a
Estimated FY25 price/earnings ratio: n/a
Analysts’ consensus price target: n/a
New Zealand-based Gentrack provides essential software and services to the utilities and airports industries. The company has more than 60 energy and water utility companies as customers around the world, as well as a swathe of major airports: some of its customers include EnergyAustralia, Npower, Genesis Energy, Melbourne Airport, Sydney Airport, Gatwick, Schiphol, Orlando International Airport, and Auckland International Airport. GTK moved across to the ASX (in a dual listing) in 2014.
Gentrack has two distinct software offerings. The core business, G2.0, is a cloud-based software that allows utility providers to manage and bill their client base. This division grew its revenue by 37% in FY23, to NZ$148 million, with some major client wins in the Middle East.
The second product, Veovo, is an enterprise resource planning (ERP) software product built for the airport industry, to help manage passenger flows, flight information, baggage handling and other tasks. The Veovo “intelligent airport” platform lifted its revenue by 21%, to NZ$21.9 million, winning a contract with Sydney Airport, among others. Veovo is now used in more than 140 airports, in 25 countries, using data insights to improve operations. Veovo is leveraging this business into the rail and transit, road traffic and ski and theme park markets.
Overall, in FY23 (year ending September 30), Gentrack lifted total revenue by 34.5%, to NZ$169.9 million, powered by the increase in utilities revenue. Earnings before interest, tax, depreciation, and amortisation (EBITDA) almost tripled, from NZ$8.1 million in FY22 to NZ$23.2 million, enabling a net profit of NZ$10 million, compared to a loss of NZ$3.3 million in FY22. But Gentrack did not pay a dividend.
Total “underlying” revenue grew by 47%, and “underlying recurring” revenue grew by 59% – that’s committed monthly recurring revenue (CMRR) and non-contracted recurring revenue (TRR). The FY23 result did include NZ$27.6 million of one-off revenues from discontinued (insolvent) customers in the UK: excluding the insolvent customers that will soon be washed-out of the P&L, annual recurring revenue (ARR) jumped 51.2%, to NZ$105 million. At a net profit level, the company swung from a NZ$3.3 million loss in FY22 to a NZ$10.0 million profit.
The strong underlying growth in both the Utilities and Veovo businesses enabled Gentrack to upgrade its FY24 revenue guidance, which has been increased to about NZ$$170 million (from previous guidance of NZ$157 million—$160 million). FY24 EBITDA is now expected to be between NZ$20.5 million and NZ$25.5 million. Gentrack does not capitalise any research and development (R&D) spending, so its EBITDA is effectively equivalent to pre-tax profit. The company has a NZ$50 million of net cash.
Earlier this month, Gentrack announced a strategic investment of $12 million in Amber, an Australian energy technology firm whose state-of-the-art technology automates batteries, enabling consumers to reduce energy bills significantly and cut carbon emissions. The company currently leads in home battery automation in Australia, a country that has the highest global rooftop solar penetration and a highly advanced two-way energy grid. Although small, and early-days, the partnership between Gentrack and Amber hopes to deliver an end-to-end solution for billing, optimisation, and customer care for household batteries, EV chargers, and other smart devices. Combining their capabilities, the two companies aim to allow utilities worldwide to quickly introduce new home battery and EV energy services.
Most of Gentrack’s customers operate in highly regulated environments and are therefore “sticky” clients. And the company is poised at the early stages of what could be a global transformational moment, in the way energy companies are transitioning to the cloud and adapting their systems to meet energy transition and net zero objectives, one of the world’s most significant imperatives.
Gentrack is not well followed by analysts – hence the lack of consensus forecasts – but I’m more than comforted by the fact that two very respected Australian small-cap fund managers, NAOS Asset Management and Tamim Asset Management, own the stock as high-conviction positions. I think there is plenty of upside for this emerging star.
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