by Elio D'Amato
Many investors think the only way to make returns in the sharemarket is by taking large risks. However, deeper inspection can often expose little gems with great fundamentals at a bargain price.
The reality is that there will be periods in a company's life where price performance is not reflective of the underlying fundamentals of the business. While for many, such a divergence can be disheartening, for smart investors this can become an opportunity.
One such "hidden gem" that we believe represents an opportunity is Hansen Technologies. Hansen has been a Stock Doctor star growth stock since March 2015. Since then the share price has increased by more than 75 per cent. That said, it has fallen close to 30 per cent since the record high of October last year.
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Hansen is a global billing solution and customer care provider specialising in the energy, pay TV and telecommunications industries. The company was founded in 1971. Hansen evolved with technology improvements, building its reputation on reliability with consistent delivery for both the company's clients and shareholders.
Pleasingly, the company has benefited from the leadership of Andrew Hansen who, since 1990, has successfully delivered his vision and strategy. We expect this to continue. It's also great to see the Hansen family remain significant holders in the company as a demonstration of their commitment to their business.
The landscape in which Hansen operates is slow moving. When you are dealing with large utility providers which above all else value the ability to deliver a bill on time and collect revenue, it is not easy to convince providers of the benefits of switching. Proven track record
The good news is Hansen has managed to do that. The company has a strong book of local and global clients with a proven track record of securing new contracts.
We suspect the recent share price weakness is due to the company's performance in the first half of 2016-17. It was in line with our previous lofty expectations.
Hansen is a global business. Its strategic acquisitions have resulted in immense growth in scale and it services four sectors: telecommunications is 32 per cent of its business, the energy sector accounts for 29 per cent, pay TV for 25 per cent and water accounts for 7 per cent. This illustrates the strength of the model in delivering specialised tailor-made solutions to generate ongoing revenue from clients who are unlikely to move once the system is in place.
This is evidenced by the lack of clients leaving Hansen over several years.
Looking forward to the full-year result for 2016-17, management has reaffirmed revenue guidance of between $165 million and $175 million, implying growth of between 10.6 and 17.3 per cent, while targeting an operating margin of between 25 and 30 per cent.
We believe the company is well placed to meet this guidance over the next 12 months and beyond, with further synergies from recent acquisitions and continued organic growth.
We believe the risks to this positive story are a rise in the Australian dollar and the inability to retain clients. It's worth noting there are a high number of competitors, domestically and internationally. Hansen remains competitive and is winning client contracts regardless.
To sum up, prospectors panning for gold nuggets in the sharemarket river will often need to stand against the flow to unearth a hidden gem. Recent price weakness in a great business like HSN is one such opportunity. We continue to identify HSN as a Star Stock as we believe that the fundamentals reflect a relatively lower risk profile compared with the general market. Elio D'Amato is director of research and education at Lincoln Indicators and creator of Stock Doctor. www.lincolnindicators.com.au
HSN Price at posting:
$3.40 Sentiment: Hold Disclosure: Held
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