Company Overview: BSA Limited (ASX: BSA) is engaged in the provision of services across communications, utility infrastructure and also provides property solutions. The Group operates primarily in two business segments: Communications & Utility Infrastructure (CUI) – supports the telecommunications, subscription television and utility industries; Advanced Property Solutions (APS)- enables design, installation, maintenance, and optimisation of building services for assets in facilities and infrastructure space.

BSA Details

Acquisition Benefits to Drive Growth Amidst COVID-19 Volatility: The company delivered stable financial results in FY21, despite the impact of the COVID-19 pandemic on the sector. It continued with its commitment of providing stable dividend returns to its shareholders and declared a final dividend of 0.5 cents per share, reflecting a pay-out ratio of 60% of NPAT.

FY21 Performance Overview:

• The company reported revenues of $422.5 million in FY21, reflecting a decrease of 13.2% on the prior year, primarily due to stabilising of nbn volumes after the peak in FY20. Further, there has been an uptick in the Annuity style revenues, which contributed 84% of the sales mix in FY21, compared to 81% in FY20.
• Underlying EBITDA of the Group stood at $23.1 million, reflecting a marginal decrease on the prior year due to the impact in volumes. However, there has been an increase in Underlying EBITDA margin by 20 bps to 5.5%.
• There has been a decrease in Underlying NPAT to $6.6 million during the year, from a level of $9.9 million in FY20, impacted by an increase in non-cash amortisation charges.
• The company was able to maintain the operating cash conversion at a stable level of 77% during the year.

BSA ended the year with a net cash position and reflecting a decrease on FY20 levels predominantly due to repayment of ATO deferrals, acquisition of Catalyst ONE, as well as cash impact of significant items.

Trend in Operating Cash Conversion (Source: Analysis by Kalkine Group)

Key Achievements in FY21:

• The company has increased its market share from ~26% to ~36% in the nbn space, during the year.
• It has also rolled out BSA Field Service Lightning (Salesforce), across its APS portfolio.
• The Group is well-positioned to leverage on the wireless market, post the acquisition of Catalyst ONE.
• BSA has further identified target sectors for diversifying its growth prospects and has also appointed an advisory firm in this regard.

Change of Director’s Interest:

As per a recent update, the company’s director Brendan York has undergone a change of interest in the company and has acquired 647,665 ordinary shares at the price of $0.285 per share.

Top 10 Shareholders: The top 10 shareholders together form around 83.10% of the total shareholding, while the top 4 constitute the maximum holding. Naos Asset Management Ltd   and Lanyon Asset Management Pty Limited   are holding a maximum stake in the company at 34.10% and 22.39%, respectively, as also highlighted in the chart below:

Top 10 Shareholders (Source: Analysis by Kalkine Group)

Key Metrics:   The company reported gross margin of 24.1% in FY21, and net margin stood at 0.4%. Asset turnover stood at 3.03x, compared to industry median of 0.62x. There has also been an improvement in the leverage profile with debt-to-equity ratio at 0.31x during FY21 end, compared to 0.51x as of FY20 end.

Revenue & Leverage Profile (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the following risk factors:

• Impact of COVID-19 Pandemic: The Group has updated that its Q1FY22 results have been significantly impacted by COVID-19 restrictions in NSW and Victoria, which comprise of ~75% of the company's operations.
• Risk of Labour: The company also depends on the expertise of skilled personnel & labour for its functioning. Any challenge in access to key resources might impact the continuity in operations.

Outlook: In view of the impact of the pandemic, the Group expects its H1FY22 revenue to be in the range of $200 - $210 million, and underlying EBITDA in the range of negative $2 million to negative $4 million. However, the management expects to return to prior-year levels of revenue and earnings in the second half of FY22. It also remains committed to its 3-year revenue target of $750 million, with EBITDA margins of 6-8%.

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

Source: 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

The stock of BSA gave a negative return of ~15.51% in the past one year. The stock is currently trading lower than the 52-weeks’ average price level band of $0.240 - $0.380. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price low double-digit (in percentage terms). The company might trade at some discount to its peers’ average, considering the impact of COVID-19 on its operations, and muted H1FY22 guidance levels. For valuation, few peers like Downer EDI Ltd (ASX: DOW), NRW Holdings Ltd (ASX: NWH), Millennium Services Group Ltd (ASX: MIL), and others have been considered. Considering the current trading levels, indicative upside in valuation, stable performance in FY21, net cash position, optimistic outlook for H2FY22, and inherent risks of COVID-19 pandemic, we give a “Speculative Buy” recommendation on the stock at the market price of $0.245, as of 10 December 2021, 11:36 AM (GMT+10), Sydney, Eastern Australia.

BSA Daily Technical Chart, Data Source: REFINITIV

Note: The purple line reflects the RSI (14-day period)

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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