Company Overview: BSA Limited (ASX: BSA) operates in technical services contracting industry and caters clients in communications and utility infrastructure, and property solutions. The company was listed on ASX in November 1999. The Group is organized into two operating segments, namely BSA | Communications & Utility Infrastructure (CUI), and BSA | Advanced Property Solutions (APS). BSA | CUI offers bundled services and caters to telecommunications, subscription television and utility industries, whereas BSA | APS provides design, installation, maintenance, and optimisation services, including fire detection, suppression, heating, ventilation, electrical, and other services.

BSA Details

Aim: “Go-to-bridge between B2B customers along with pooling of skilled technicians”: BSA Limited (ASX: BSA) works through segments BSA Communications & Utility Infrastructure (CUI) and BSA Advanced Property Solutions (APS).

Recent Updates:

• In December 2021, Mr Brendan York was appointed as an additional Non-Executive Director of BSA. He will also be working within the potential of Portfolio Manager for NAOS Asset Management Limited.
• NAOS Substantial Holders increased their substantial shareholding in the company from ~33.01% to ~34.1%.

Segment Fragmentation:

FY21 Financials:

Despite the East Coast of Australia getting most affected during the pandemic - which constitutes ~75% of the BSA’s operations – the company provided stable 2021 financials and considered the most successful years in respect of gaining long term contracts (including contracts with major customers like NBN, Foxtel and Telstra):

• Sales Revenue: Due to changing protocols and stay-at-home orders, BSA suffered volume loss in its facility maintenance business, servicing the commercial, education and industrial sectors. Therefore, the company faced a ~14% Y-o-Y fall in the revenue from operating activities to ~$418.35 million in FY21. Other factors were nbn volumes stabilisation post FY20, and APS COVID-19 impact.
• NPAT: The group’s underlying NPAT was down from ~$9.9 million in FY20 to ~$6.6 million in FY21, owing to non-cash amortisation charges related to technology and acquisition. Whereas the reported NPAT was ~$1.48 million for FY21 versus net losses of ~$0.96 million in FY20.
• Dividend: BSA managed to provide a fully franked final dividend of ~AU$0.5 cents per share (60% payout ratio).
• Balance Sheet: With the ~77% of Operating Cash-flow (OCFBIT/EBITDA) conversion rate, the cash balance at the end of 30^th June 2021 stood as ~$12.82 million versus ~$37.74 million as of 30^th June 2020.

Revenue Mix Highlights (Source: Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 83.10% of the total shareholding, while the top 2 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 has reported an improvement in its debt-to-equity ratio from ~0.51x in FY20 to ~0.31x in FY21. On the other hand, it reduced its current ratio from ~1.02x in FY20 to 1.00x in FY21.

Key Metrics (Source: Analysis by Kalkine Group)

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

• COVID-19 Risks: The company is prone to the impacts caused by government-mandated lockdowns due to the COVID-19 pandemic, which might affect its functions, employees and further factors.
• Workforce Shortage: Due to low migration and COVID-19, the company is susceptible to the risks associated with the workforce availability and their attendance, thereby affecting the operations and construction areas.
• Delays in Construction: Due to the government restrictions and lockdowns, the company faced lower efficiency, delays, and suspension of constructions and in its services.
• Synergy Risks: The gap between the expected synergies from acquisitions and the actual outcomes might also become a hindrance in the organic operations and growth.

Outlook: Despite the COVID-19 pandemic, the company expects its 1HFY22 revenue in the ambit of ~$200 -~$210 million, while the Underlying EBITDA (Loss) would be ~($2.0) – ~($4.0) million. With the acquisition of Foxtel, the company anticipates its market share to increase from 50% to 100% in its CUI segment. Including contracts with major customers like NBN, Foxtel, Catalyst One and Telstra, BSA considered FY21 as the most successful year in respect of gaining new long-term contracts. Continuing with the healthy pipeline across both the segments, it expects a rebound in the deferral of work as the restrictions will ease. Moreover, the company continues to grow organically and inorganically and is on track to achieve its revenue target of ~$750 million by FY24 with EBITDA margin of 6-8%. BSA is likely to release its 1HFY22 results on 16^th February 2022.

The Group 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: As per ASX, the stock of BSA is trading below its 52-weeks’ average levels of $0.210-$0.335. The stock of BSA gave a negative return of ~32.26% in the past nine months and a negative return of ~35.38% in the past six months. The stock has been valued using an EV/Sales multiple-based illustrative relative valuation method and arrived at a target price of low double-digit (in percentage terms). The company might trade at some discount to its peers’ average multiple, considering the shutdowns and halt in operations and constructions, labour market constraints and a slight hiccup expected in 1HFY22. For the purpose of valuation, a few peers like Millennium Services Group Ltd (ASX: MIL), Downer EDI Ltd (ASX: DOW), NRW Holdings Ltd (ASX: NWH) have been considered. Considering the expected upside in valuation, optimistic target by FY24, gaining market share through Foxtel, reduction in total debt, track record of paying decent dividends, current trading levels, and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing market price of $0.210, down by ~2.326%, as on 28^th January 2022.

BSA Daily Technical Chart, Data Source: REFINITIV

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

Note 2: Investment decisions 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 analysis has been achieved and subject to the factors discussed above alongside support levels provided.

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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