Company Overview: Service Stream Limited (ASX: SSM) is a provider of essential network services including access, design, build, installation and maintenance. The company provides these services across fixed-line and wireless telecommunications networks as well as to a range of water, gas, and electricity network owners and operators nationally. For Australia’s digital wireless network providers, SSM manages engineering design and construction for build-only projects and provides full end-to-end services. The company also delivers large programs of design and construction work across fixed-line networks. Service Stream Limited promotes increased use of data analytics and Business intelligence tools to drive improved business outcomes.
SSM Details
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Improvement in Top-Line and Bottom-Line: 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 continues to focus on providing superior service delivery, enhancing its existing client relationships, and optimising its delivery model to drive operational effectiveness, continual improvement, and support future growth. In order to optimise its delivery model, the company has been making investments in technology to support growth and increase efficiency. Further, the company is also focused on improving its Group EBITDA margins through scale and operational efficiencies. Over the last five years, the company has witnessed significant improvement in its top line as well as 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)
In response to COVID-19, the company has implemented a range of protocols to minimise the spread of the virus while supporting its clients’ programs of work and the continuity of its field operations. The company is working with its clients to ensure that it is able to continue supporting their critical network infrastructure and provide certainty and continuity to its workforce. With a healthy contracted pipeline of ongoing work across a blue-chip client base, SSM seems to be well-positioned to get through the current challenging environment. SSM continues to assess and progress acquisitions that provide revenue diversity and support growth across known or adjacent markets.
FY19 Result Highlights: For FY19, the company reported total revenue of $852.2 million, up 35% on the previous year, driven by the growth in each of the two reporting segments of Telecommunications and Utilities, with the acquisition of Comdain Infrastructure contributing $160.2 million of the latter. Over the year, the company’s EBITDA increased by 33% to $89.5 million and its NPAT increased by 21% to $49.9 million.
During the year, the company experienced a 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 the prior year, in line with expectations. 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. On the back of improved financial results, the company paid total dividends of 9.0 cents per share (fully franked) in FY19, up 20% on the previous year, in line with the company’s progressive dividend policy.
Financial Performance (Source: Company Reports, Thomson Reuters)
H1FY20 Highlights: For the first half of FY20, the company reported revenue of $348 million, up 43% on the previous corresponding period (pcp). The revenues from Telecommunications division were around $297.9 million in H1FY20, in line with pcp, with the increase in Fixed Communications offset by the decrease in Network Construction nbn D&C works as expected. 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 Jan-19.
During the period, the company was focused on the identification of organisational alignment and physical co-location opportunities. The EBITDA from Operations for the half-year stood at $58.1 million, up 50% on pcp. The company reported adjusted NPAT of $25.1 million, up 28% on the previous corresponding period. During the period, the company generated $32.8 million of operating cashflow before interest and tax. For H1FY20, the company paid a dividend of 4 cents per share (100% franked), up 14% on pcp. As at 31 December 2020, the company had a net debt of $4 million.
H1FY20 Results (Source: Company reports)
Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 29.34% of the total shareholding. Coen (Thomas) and TIGA Trading Pty Ltd hold maximum interest in the company at 9.42% and 5.55%, respectively.
Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)
Key Metrics: For H1FY20, the company’s gross margin stood at 94.1%, higher than the industry median of 14.3%. For the same period, the company’s net margin stood at 5.5%, higher than the industry median of 2.6%. The company has a ROE of 8.8%, higher than the industry median of 4.1%. The company has a current ratio of 1.35x, higher than the industry median of 1.1x, demonstrating that the company is well equipped to pay its short-term obligations.
Key Metrics (Source: Refinitiv, Thomson Reuters)
Strong Track Record of Paying Dividends: Service Stream Limited has a strong track record of paying regular dividends to its shareholders. During 2015-2019, the company’s dividends grew at a CAGR of 56.51%. The annual dividend yield of the company is about 4.05% on a five-year average basis (FY15-19). 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. With its robust balance sheet, cashflow and liquidity, the company seems to be well placed to maintain its commitment to dividends.
Dividend History (Source: Company Reports)
COVID-19 Update: Due to COVID-19, the company has experienced some negative impacts, mainly related to increased costs to safely deliver field-based operations. Due to the pandemic, some clients have temporarily paused some work programs and have delayed commencement of individual minor projects. The company has implemented a range of protocols to minimise the spread of COVID-19 while supporting its clients’ programs of work and the continuity of its field operations.
Key Risks: The company is exposed to the risks and threats of COVID-19 as it could increase the overall cost of the company’s operations and delay its field operations. Further, the potential variability in customer demand presents operational challenges to the Group. As technology continues to change and evolve at a rapid pace, it is possible that such advances may cause disruptions to certain elements of the markets in which the company operates or to services that Service Steam Limited provides.
What to Expect: At the time of releasing its H1FY20 results, the company had informed that it expects EBITDA from Operations for 2H20 to be in line with that reported for 1H20. It also expected a stronger revenue contribution in 2H20 from Wireless, Comdain Infrastructure and nbn maintenance activities on the back of higher customer volumes.
The company expects the COVID-19 impacts to continue into at least the early part of FY21. As per the company’s latest update, it expects its EBITDA from Operations for FY20 to be approximately $108 million, which remains a record operating result for the Group. SSM continues to be in a decent position, with a healthy contracted pipeline of ongoing work across a blue-chip client base. The company has scheduled to release its FY20 results on 18th August 2020. Meanwhile, SSM continues to assess and progress acquisitions that provide revenue diversity and support growth across known or adjacent markets.
Key valuation Metrics (Source: Refinitiv, Thomson Reuters)
Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)
EV/EBITDA 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 stock of SSM has corrected by 33.82% in the last six months and is inclined towards its 52-week low price of $1.535, offering a decent opportunity for accumulation. With its robust balance sheet, cashflow and liquidity, the company seems to be well placed to maintain its commitment to dividends, and to secure expansion opportunities across the utilities and telecommunications markets, as and when they occur. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of lower double digit-upside (in % terms). Considering the company’s decent financial and operational performance in FY19 and H1FY20, its FY20 outlook, its track record of paying regular dividends, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.815, down 0.275% on 23rd July 2020.
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SSM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)
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