Company Overview: BSA Limited (ASX: BSA) is a national provider of contracting services to subscription TV and telecommunication companies. The Group is organized into two segments, namely BSA | Communications & Utility Infrastructure (CUI) and BSA | Advanced Property Solutions (APS). BSA | CUI provides services to the telecommunications, subscription television and utility industries, including the delivery of bundled services over fixed-line multi-technology networks, the installation of subscription television, and the installation of smart meters. BSA | APS provides the design, installation, maintenance, and optimization of building services for all hard assets in commercial and industrial buildings and properties.
BSA Details
Healthy Balance Sheet Supported by Rising Cash Position: BSA Limited (ASX: BSA) mainly provides contracting services to subscription TV and telecommunication companies. The market capitalisation of the company stood at ~$121.29 million as on 13th November 2020. The company has refreshed its business development structure, skillset, and strategy in order to ramp up the client diversification and push into complimentary markets. Despite the challenges posed by COVID-19 pandemic, the company has showcased resilience and tenacity in its core businesses and continued with the delivery of annuity-like cash-backed profits and decent returns to shareholders in FY20.
The geographical footprint of the company is a key competitive advantage and the company is further planning to expand its business into regional and remote Australia. The company aims to grow inorganically via potential strategic acquisitions, which will allow it to enter complementary markets whilst expanding its overall capabilities.
The company closed FY20 with a healthy balance sheet supported by an increased cash balance of $32.7 million. This was underpinned by deferral measures provided by the government agencies to weather near-term uncertainty. In addition, the company recorded operating cash inflow before interest and tax of $18.3 million as compared to $19.1 million in FY19. The company paid a fully franked final dividend of 0.5 cents per share (cps), which took the total FY20 dividend to 1.0 cps. This reflects a rise of 100% on FY19 dividend amount of 0.5 cps.
Growth in Net Cash (Source: Company Reports)
Divestment of HVAC Build Major Projects Division Supported Growth in Recurring Revenue: During FY20, the company recorded revenue from continuing operational streams amounting to $490.4 million, reflecting a rise of 4.4% over pcp. In addition, the company reported recurring revenue of 80%, reflecting an increase on the pcp as a result of its divestment of HVAC Build Major Projects division in FY19. Over the span of three years from FY18 to FY20, the company reported a CAGR of 6.6% in revenue. During the same year, the company reported underlying EBITDA of $25.9 million, up by $1.3 million on pcp. However, discretionary work deferral in some sectors due to COVID-19 pandemic has resulted in a fall of 27.8% in reported NPAT to $7.8 million.
Financial Summary (Source: Company Reports)
Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of BSA Limited. Naos Asset Management Limited is the largest shareholder in the company, with the percentage holding of 27.99%.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Margins: During FY20, gross margin of the company stood at 24.3%, reflecting a YoY growth of 0.4%. Net margin of the company stood at 1.6% as compared to the industry median of 11.9%. Return on Equity for the year stood at 22.9%, which is higher than the industry median of 18.8%. On the leverage side, asset to equity ratio stood at 4.57x as compared to the industry median of 2.38x of Industry.
Key Margins (Source: Refinitiv, Thomson Reuters)
FY20 Segment Performance: During the onset of COVID-19, the key contracts of Communications & Utility Infrastructure (CUI) segment were labelled as essential service. As a result of strong performance in major platforms, CUI recorded revenue growth of 8.5% to $272.9 and reported EBITDA amounted to $21.0 million, indicating a rise of 8.8%. CUI also finished construction under the nbn Multi-technology Integrated Master Agreement (MIMA).
With respect to Advanced Property Solutions (APS) segment, the company recorded revenue amounting to $217.5 as compared to $218.3 million in FY19. EBITDA for the segment amounted to $8.6 million against $9.5 million in FY19. The segment experienced solid profitable growth in Fire Build as a result of the successful execution of several projects during the year.
Segment Performance (Source: Company Reports)
Commencement of Buy Back: On 5th November 2020, the company announced an on-market buy-back of its fully paid ordinary shares for a period of 12 months, which is likely to commence on 19th November 2020. The buy-back is likely to improve shareholder returns, capital efficiency, and balance sheet flexibility in order to carry out future growth and investment opportunities. The company will finance its share buy-back via existing cash reserves.
Acquisition of Catalyst ONE Pty Limited: On 8th October 2020, the company agreed to acquire 100% of share capital of Catalyst ONE Pty Limited for an upfront payment of $2.0 million. However, this consideration amount can be increased up to $5.5 million, which is based on the achievement of agreed EBITDA targets over the span of two years. The acquisition will support the company with a strategic entry point into the wireless telecommunications market. In addition, the acquisition strongly complements its existing strengths in Fixed Line Telecommunications Services.
Secured Extension for OMMA Contract: In a recent update to the market, the company notified that it has obtained an extension of 6 months to 30 June 2021 with respect to Operate and Maintain Master Agreement (OMMA) contract with NBN Co. The company also has an option to increase the extension for additional six months to December 2021. The company will continue to provide nbn with numerous activation and assurance services to its Fibre to the Premise, Fibre to the Node, Fibre to the Basement, Fibre to the Curb, and Hybrid Fibre Coax network infrastructure.
Key Risks: The operational and financial performance of the company could be impacted by the delay in contracts, which may be further impacted by a physical change in the climate. Moreover, the business is also exposed to operational risks such as rising market share of competitors and industry downturn. In addition, the company’s inability to fulfil contractual and other arrangements may act as a headwind for the company’s growth. BSA Limited is also sensitive to financial risks, such as credit risk and liquidity risk.
What to Expect: The company seems well-placed for future business growth as the economies are returning to normal conditions. BSA is likely to witness high demand for most of its services. The company possesses backlog of upgrades and project work, which are yet to be completed. BSA also has the potential to be benefitted from the Government stimulus work. The company may witness positive impacts in FY22. With respect to the CUI segment, the company would continue current operational performance on existing core contracts. The company will also focus on the expansion of CUI segment into the wireless market. With respect to Advanced Property Solutions (APS) segment, BSA may optimize investment in data driven asset management. The company has scheduled to conduct its 2020 Annual General Meeting on 25th November 2020.
Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: Price to Earnings Multiple Based Relative Valuation (Illustrative)
Price to Earnings Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)
Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months
Stock Recommendation: The healthy balance sheet will support the company in navigating the current uncertain environment. Also, the company is aiming for profitability growth in FY21. The stock of BSA has corrected 6.66% and 28.20% in the last one and nine months, respectively. As a result, the stock is trading towards its 52-week low level of $0.230, offering a decent opportunity for accumulation. We have valued the stock using the price to earnings multiple based illustrative relative valuation and arrived at a target price with an upside of low double-digit (in percentage terms). On a technical analysis front, the stock of BSA has a support level of ~$0.275 and a resistance level of ~$0.310. Considering the healthy balance sheet, decent growth in topline, rising cash position, current trading levels, and key investment risks associated with the business, we give a ‘Speculative Buy' recommendation on the stock at the current market price of $0.280 per share, with no change on 13th November 2020.
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BSA Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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