Company Overview: Service Stream Limited (ASX: SSM) is a provider of integrated end-to-end asset life-cycle services across essential infrastructure networks within the Telecommunications and Utilities sectors. The company specializes in the design, construction, operation and maintenance of assets across Utility and Telecommunication networks. It also provides a range of maintenance services across both fixed-line and wireless technologies. Further, it remains focused on providing superior service delivery and execution for its valued clients. Service Stream Limited promotes increased use of data analytics and Business intelligence tools to drive improved business outcomes.


SSM Details

Continuous Improvement in Top Line and Bottom Line: Service Stream Limited (ASX: SSM) is an essential network services provider which specializes in the design, construction, operation and maintenance of assets across utility and telecommunication networks. The company is focused on providing superior service delivery and execution for its valued clients while maintaining or improving its EBITDA margins through scale and operational efficiencies. In the last five years, the company has witnessed continuous improvement in its top line and bottom line. From 2015-2019, the company’s revenue increased at a CAGR of 19.98% and its Adjusted NPAT increased at a CAGR of 49.02%. 


Financial Performance (Source: Company Reports)

The company currently has a strong pipeline of business development opportunities across both Telco and Utilities networks. In addition, it is accessing further growth and diversification opportunities to improve its performance. One of the key priorities of the company in FY20 is to secure organic growth opportunities as they emerge across existing operations. Moving forward, the company is expecting a stronger revenue contribution from Wireless, Comdain Infrastructure and nbn maintenance activities on the back of higher customer volumes. 



FY19 Results Highlights: In the financial year 2019, the company delivered earnings over and above its full-year guidance. During FY19, the company’s total revenue increased by 35% to supported by the growth in each of the two reporting segments of Telecommunications and Utilities.  In FY19, the company experienced strong demand for services across both telecommunications and utilities markets. From the Telecommunications segment, the company reported revenue of $52.6 million, up 10% on prior year, in line with expectation. From the Utilities segment, the company reported revenue of $166.7 million, up 156% on prior year, primarily due to the inclusion of Comdain Infrastructure in 2H19. Over the year, the company saw 33% improvement in its reported EBITDA and 27% growth in EBIT which stood at $73.3 million in FY19.

The company’s NPAT increased to $49.9 million in FY19, up 21% on previous year. One of the major highlights of FY19 was the acquisition of Comdain Infrastructure which contributed significantly to the second half results of FY19. Despite the cash outlay of $82.8 million associated with the acquisition of Comdain Infrastructure in January 2019, the company ended FY19 in a net cash position of $10.5 million.

On the back of strong financial results, the company paid total dividends of 9.0 cents per share (fully franked) in FY19, up 20% on previous year, in line with the company’s progressive dividend policy approach.


FY19 Key Financial Measures (Source: Company Reports)

H1FY20 Results Highlights: In the first half of FY20, all profitability measures were up, relative to 1HFY19. For the period, the company reported EBITDA from operations of $58.1 million, up 50% on pcp. The company reported revenue of $348 million in H1FY20, up 43% on pcp, driven by the $147.3 million contributions from Comdain Infrastructure and strong growth from Fixed Communications. For H1FY20, the company reported adjusted NPAT of $25.1 million, up 28% on pcp. 

Revenues from the Telecommunications division were around $297.9 million in H1FY20, in line with pcp, with increase in Fixed Communications offset by decrease in Network Construction nbn D&C works as expected. Over the period, the company saw strong demand for nbn customer activations coupled with retained market share leading to a 46% increase on pcp activation volumes. From the Utilities segment, the company reported revenue of $199.2 million, up 288% on pcp, mainly due to the inclusion of Comdain Infrastructure following its acquisition in January 2019. For H1FY20, the company declared a dividend of 4.0 cents per share, up 14% on pcp.


H1FY20 Key Financial Measures (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 25.96% of the total shareholding. The Coen (Thomas) and TIGA Trading Pty Ltd hold maximum interest in the company at 9.43% and 5.56%, respectively.


Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
 
A Quick look at Key Margins: For H1FY20, the company’s gross margin stood at 94.1%, significantly higher than the industry median of 13.6%. For the same period, the company’s EBITDA margin stood at 11.6%, higher than the industry median of 4.5%. SSM has a net margin of 5.5%, higher than the industry median of 2.7%. The company has a current ratio of 1.35x, higher than the industry median of 1.18x, demonstrating a decent position to pay its short-term obligations. 


Key Metrics (Source: Refinitiv, Thomson Reuters)
 
Strong Track Record of Paying Dividends: Service Stream Limited currently has a strong track record of paying regular dividends to its shareholders. During 2015-2019, the company’s declared dividends increased at a CAGR of 56.51%. In FY19, the company declared a total dividend of 9 cents per share, up 20% on pcp. And for the first half of FY20, the company paid an interim dividend of 4 cents per share, up 14% on pcp.


Dividend History (Source: Company Reports)

COVID-19 Update: In response to COVID-19, the company has implemented important measures across its business to protect its people and operations. The company has put restrictions on Air travel and non-essential meetings, hosted functions and travel across its inter-office networks. Further, it has arranged daily medical screening checks for its staff across its office network, particularly for those functions which are not practically able to work remotely. Amid the current challenging situation, the company is benefiting from having advanced BCP and preparedness planning embedded into its operations which have been rigorously tested over several years.  

What to Expect: Service Stream Limited currently enjoys a strong pipeline of business development opportunities across both Telco and Utilities networks. Further, it is placed well to secure additional organic growth opportunities across core markets. In FY20, the company is assessing further external growth and diversification opportunities with a continued focus on core markets.

Going forward, the company is focused on operating across growing markets and remains in an excellent position to deliver further earnings growth in FY20. In H2FY20, the company is focused on finalising Comdain Infrastructure integration activities, mobilisation of Sydney Water and QUU SCADA contracts, assessment of external growth opportunities and progress OMMA & NMRA renewals. 

The company’s EBITDA from operations in the second half of FY20 is expected to be in line with that reported for 1H20, subject to a continuation of prevailing market conditions. Further, the company is expecting a stronger revenue contribution in 2H20 from Wireless, Comdain Infrastructure, and nbn maintenance activities.


Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)
 
Valuation Methodologies:
Method 1:  EV to EBITDA Based Relative Valuation (Illustrative)

 EV/EBITDA Multiple Based Approach (Source: Refinitiv, Thomson Reuters)

Method 2: Price to Sales Based Market Multiple Approach (Illustrative)

Price to Sales Based Market Multiple Approach (Source: Refinitiv,Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: In the past six months, the stock of SSM has declined by 17.86% on ASX and is trading below the average of its weeks low and high price of $1.535 and $3.060, respectively, offering a decent opportunity for accumulation. The stock has a market capitalization of around $844.61 million and an annual dividend yield of 4.59%. We have valued the stock using a relative valuation method, i.e., EV/EBITDA multiple and 3-year average P/Sales market multiple of 0.92x to FY21 consensus sales figure of ~$1,032.38 Mn and arrived at a target price of lower double-digit growth (in percentage terms). Considering the company’s decent financial and operational performance in FY19 and H1FY20, its track record of paying dividends, modest outlook and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $2.11, up by 1.932% on 14 May 2020. 

 
SSM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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