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Next time you receive an electricity or phone bill, look at how itemised and detailed the statement has become. And, after the initial groan, consider the complexities of billing millions of customers each month or quarter, and ask who makes money from the technology behind it.

Hansen Technologies, a provider of billing software and services, has a low sharemarket profile. But chances are you’ve received an electricity, gas, water, phone or pay-TV bill powered by its software. From humble beginnings, it has clients in more than 40 countries.

Hansen is interesting on several fronts. Unlike most software stocks that rely on corporate and government clients for projects, the company focuses mostly on utilities. It offers an unusual combination: traits of a high-growth software company and exposure to defensive sectors.

Another attraction is Hansen’s software providing recurring, annuity-like income. Right or wrong, fund managers have paid a big premium this year for companies with more reliable, predictable revenues, given elevated earnings uncertainty in a sluggish economy.

It’s always intriguing watching small caps that are majority owned and run by the founder’s family transition to a more marketable stock. Done well, the change can create value as the share register opens up, fund managers invest, liquidity improves, and brokers start promoting the stock.

Through a related entity, the Hansen family sold 21 million shares, or 23 per cent of its shareholding, to a group of institutional shareholders in June 2013, reducing its stake to 44 per cent. The aim was to improve the stock’s liquidity and profile and presumably build a stronger share register.  Block trades in 2014 have taken the Hansen family’s stake to 23 per cent, and further boosted share liquidity.

That is a smart move. After listing in 2000, Hansen tracked mostly sideways for years, and by 2009 was going nowhere with a 30-cent share price and barely any daily trade in its stock. Beneath the share-price malaise was a few years of rapid growth in Return on Equity (ROE), off a low base.

As so often happens, rising ROE was an excellent sign of sustained profitability growth, improving intrinsic value and, ultimately, a higher share price. Hansen soared from 30 cents in early 2009 to $1.54, notching impressive price gains this year after an excellent full-year result.

Chart 1: Hansen Technologies

Source: ASX

Assessing the strength of Hansen’s sustainable competitive advantage is a key issue for prospective investors. In some respects, Hansen fights above its weight: it has more than 400 staff in 12 countries, yet is a minnow in a global utilities software market dominated by tech giants.

Hansen emphasises its ability to provide more “hands-on” customer service to utilities than large software providers. Successful entrepreneurial companies have a knack of holding on to big clients through more responsive, attentive service – rather than competing on price alone.

Hansen has cleverly expanded its offering to include purpose-built data-centre facilities, application management and technology-managed services. By providing and operating software, it gets more “touch points” into customers, makes its product stickier, and increases switching costs.

Moreover, billing software is “mission critical” and not something to be changed lightly. Utilities live or die by their ability to bill customers accurately and on time, and avoid screw-ups. There is no margin for error when cash flow depends on millions of people receiving and paying a monthly bill.

Hansen’s other advantage is longstanding relationships with utility providers, having been founded in 1971. Management continuity and staff tenure double the technology industry average suggest a stable, conservative company.

Strong relationships and good service are terrific assets. However, a sturdier sustainable competitive advantage would come from a clear technology advantage over its software rivals.

Billing software is becoming more complex by the day. As smart meters are eventually rolled out in stgeloped countries, as telcos offer an expanding array of pricing plans, and as more services are transacted on mobile stgices, billing technology will become even more sophisticated.

Billing software providers that can help utilities promote more flexible pricing options – across a bigger range of products and services – will be in great demand. Think of all the possible pricing permutations for just a single mobile phone. An easy conclusion is these trends will play into the hands of bigger software providers with scale, yet Hansen is holding its own.

Its long-term performance is improving. ROE rose from 9.1 per cent in FY07 to 25.6 per cent in FY11, before dropping to 15.3 per cent in FY13 after a profit fall, according to Morningstar. It recovered to 22.4 per cent in FY14 thanks to a strong full-year result.

Revenue rose 35 per cent to $86 million, and underlying earnings rose 53 per cent to $24.1 million. Astute acquisition sand a stronger second half underpinned the cracking result. The share price has responded with a 20 per cent gain in the past two months.

Hansen’s ROE is strong, but it still has work to do to catch up to sector leaders such as Technology One. Its ROE has been above or near 30 per cent for the past five years. The impressive Data#3 has had ROE of well above 30 per cent for a decade. Hansen needs to get its ROE to similar levels in the next few years to create a new round of share-price gains.

Acquisitions are an important part of Hansen’s growth strategy. It appears to have a vertical and horizontal integration strategy: buying complementary business here and overseas in its core energy and telco sectors, and moving into adjacent markets such as Pay-TV.

That provides sector and geographic diversification, and a bigger client base to cross-sell products. It also gives Hansen greater scope to grow with clients as they expand overseas and add complementary businesses, and offer an integrated billing software solution across a wider product range.

Its challenge is delivering sufficiently strong short-term profit growth to justify the share price, while sufficiently reinvesting to drive higher long-term growth from acquisitions and internal improvements. It won’t be easy in a difficult markets here and overseas.

There’s a lot to like about this company. Software is a beautiful, scalable, high-margin business when it works well, as it does in Hansen’s case. The company has a decent global footprint and utilities are a natural for annuity-like income. The main snag is valuation: its rally, long overdue, has probably run too far, too fast, at least for now.

But Hansen is easily among the more impressive small-cap industrial companies on ASX – and the type of stock that can go a long way as it builds scale in a global billing software market.

Tony Featherstone is a former managing editor of BRW and Shares magazines. This column does not imply stock recommendations. Readers should do further research of their own or talk to their adviser before acting on themes in this article. All prices and analysis at September 12, 2014.

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