Company Overview: Service Stream Limited (ASX: SSM) is a leading essential network services company that delivers a variety of services across electricity, gas, water and renewable energy utilities, and fixed and wireless telecommunication networks. The company’s utility network teams provide engineering, asset and customer management services to Australia’s leading utilities and energy providers. For telecommunication industries, SSM provides a variety of services ranging from constructing state-of-the-art broadband networks to maintaining and upgrading existing infrastructure.

SSM Details

Future Prospects Supported by Robust Contract Pipeline: Service Stream Limited (ASX: SSM) is an essential network services company mainly involved in providing integrated end-to-end asset life-cycle services across essential infrastructure networks within the Telecommunications and Utilities sectors. During the first half of FY21, SSM’s financial performance was impacted by the lower contribution from its telecommunications segment, mainly due to the conclusion of nbn construction operations last year and a step down in activation volumes. However, the company continues to demonstrate decent fundamentals in terms of profitability, balance sheet strength, quality of earnings and a robust contract pipeline across a blue-chip industrial clientele base. In its Utilities segment, SSM has a robust pipeline of new gas and utility project opportunities, underpinned by growing urban development and the upgrade or replacement of ageing infrastructure.

Looking ahead, the company is focused on maintaining its position as a leading essential service provider across its chosen markets and diversifying its revenues from a strong telecommunications bias across broader essential infrastructure markets. Further, it is focused on pursuing additional growth opportunities across its core long-term contract base and maintaining a flexible and scalable resourcing model, and proportionate Group cost base. With solid order book of future contracted revenues and future focus on pursuing additional growth opportunities, SSM seems well placed to grow into the future.

5-Year Financial Summary (Data Source: Analysis by Kalkine Group)

H1FY21 Results Highlights: For the first half of FY21, SSM reported revenue of $409.9 million, down by 17.7% on pcp, mainly due to lower Telecommunications segment revenue, which was impacted by the conclusion of nbn construction operations in FY20 and a step down in activation volumes. Over the half-year period, SSM secured several significant long-term contracts, including two multi-year agreements with NBN and one with Telstra. SSM also secured significant contract wins across utility operations. EBITDA from operations stood at $40.2 million in H1FY21, down by 30.8% on pcp. Statutory NPAT for H1FY21 stood at $16.2 million. As at 31 December 2020, the company had cash and cash equivalent of $50.48 million and total borrowings of $38.594 million and lease liabilities of $10.07 million.

Revenue Trend (Source: Company Reports)

Multi-year Agreement with Telstra: In January 2021, SSM secured multi-year (3+1+1) Field Optimisation Agreement with Telstra for the provision of design and construction services. This agreement has come at a time where demand for 5G wireless infrastructure is expected to increase, making this long-term agreement strategically more important. The agreement is for an initial period of three years, with two x one-year extension options, at Telstra’s election.

Key Metrics: For H1FY21, SSM reported gross margin of 94.5%, slightly up from 94.2% in H1FY20. EBITDA margin for H1FY21 stood at 9.6%, down from 11.6% in H1FY20. Current ratio for H1FY21 stood at 1.44x, up from 1.35x in H1FY20, demonstrating that the company has improved its ability to pay short-term obligations. Debt to equity ratio for H1FY21 stood at 0.23x, down from 0.30x in H1FY20.  

Liquidity Profile & Profitability Metrics (Data Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 30.39% of the total shareholding, while the top four constitutes the maximum holding. Coen (Thomas) and TIGA Trading Pty Ltd are holding a maximum stake in the company at 9.37% and 5.32%, respectively, as also highlighted in the chart below:  

                          

(Data Source: Analysis by Kalkine Group)

Track Record of Paying Dividend: The company has a track record of consistent dividend payment with a dividend payout ratio in the range of 48% to 74% (based on statutory EPS) over the past five years. From the analysis standpoint, the company’s dividend has increased at CAGR of ~37.74% during 2016 to 2020. For H1FY21, SSM paid an interim dividend for the half year of 2.5 cents per share (fully franked), maintaining the company’s historical payout ratio of ~60%. At CMP of $0.880, the company’s annual dividend yield stood at ~8.52%, higher than 5-year average (2016 to 2020) of ~3.92%. This demonstrates that the company is focused rewarding shareholders through dividend payments, which might attract the attention of dividend seeking investors.

Dividend Trend (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the risks of COVID-19 pandemic as it could cause increased restriction of workforce movement, and reduction in demand from the company’s customers, which may impact the company’s operations. The rate of adoption of new technology by the company’s customers, such as 5G technology, can also provide variability against expected future earnings.

Outlook: In a recent business update, SSM’s Board assured that the fundamentals of the company’s business model are strong, supported by growing and supporting a strong organic business development pipeline. In its Utilities segment, SSM currently has a positive pipeline of new utility project opportunities. For FY21, SSM expects 10% revenue growth in Comdain Infrastructure, supported by significant contract wins. SSM expects a lower contribution from its Telecommunications segment, mainly due to the conclusion of nbn construction operations in FY20 and a step down in activation volumes. SSM expects EBITDA from operations in H2FY21 to be in-line with the first-half results. Looking ahead, SSM intends to pursue growth opportunities across fixed-line and wireless telecommunications infrastructure. SSM plans to invest in solutions to further enhance customer experience and to improve operational performance. SSM’s FY21 results and outlook is expected to release on 26 August 2021.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

Analysis by Kalkine Group

*% Premium/(Discount) is based on our assessment of the company’s NTM trading multiple after considering its key growth drivers, economic moat, stock's historical trading multiples versus peer average/median, and investment risks.

Stock Recommendation: Over the last three months, the stock has corrected by 29.68% and is trading close to its 52-weeks low price of $0.830, offering a decent opportunity for accumulation. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price with an upside of low double-digit (in % terms). We have taken a slight premium to its peer average, considering the improved current ratio, decline in debt-to-equity ratio, positive pipeline of new utility project opportunities in utilities segment, while and also taking into account the that the company has been commanding a premium in the past 3-years over its peer average. We have taken peers like Telstra Corporation Ltd (ASX: TLS), Chorus Ltd (ASX: CNU), TPG Telecom Ltd (ASX: TPG), etc, all belonging to the telecom sector. Considering the company’s decent long-term growth fundamentals, robust contract pipeline across a blue-chip industrial clientele base, its continued focus on pursuing additional growth opportunities, current trading level, and valuation, we give a “Buy” rating on the stock at the current market price of $0.880, down by 0.565% as on 17 June 2021.

SSM Daily Technical Chart, Data Source: REFINITIV 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision should be made depending on the investors’ appetite on upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

Technical Indicators Defined:

Support: A level where-in the stock prices tend to find support if they are falling, and downtrend may take a pause backed by demand or buying interest.

Resistance: A level where-in the stock prices tend to find resistance when they are rising, and uptrend may take a pause due to profit booking or selling interest.

Stop-loss: It is a level to protect further losses in case of unfavourable movement in the stock prices.

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