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 provide full end-to-end services. Service Stream Limited promotes increase use of data analytics and Business intelligence tools to drive improved business outcomes.

SSM Details

Decent Top-line and Bottom-line Performance Over the Last Five Years: 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 has a decent clientele base of leading network owners and operators, regulators and government organisations and has exposure to a broad range of regulated essential infrastructure markets. The company is focused on providing superior service delivery and execution for its valued clients while improving its EBITDA margins through scale and operational efficiencies. Over the last five years, the company has witnessed significant improvement in its top-line and bottom-line with CAGR of 20.62% and 25.30%, respectively.

During COVID-19 pandemic, the company was benefitted from its exposure to essential infrastructure networks which provided a solid revenue base and resilience against the impacts of the pandemic. Looking ahead, the company expects its earnings to remain resilient, supported by its long-term contracts. In FY21, the company is focused on securing organic growth opportunities across utility operations and further bolstering the geographic expansion of Comdain’s operations. Further, the company intends to continue its search for external market opportunities supporting further growth and diversification of its revenue.

Five-Year Financial Summary (Source: Company Reports, Thomson Reuters)

FY20 Performance Highlights: For the year ended 30 June 2020, the company reported total revenue of $929.1 million, up 9.0% on FY19. It was mainly driven by decent growth in Utilities segment. From the cashflow and net cash front, the company generated $86.4 million of operating cashflow before interest and tax in FY20, up 8.5% on Y-o-Y basis. Further, the company reported EBITDA from operations of $108.1 million, up 15.9% on FY19. The company’s statutory NPAT stood at $49.3 million in FY20, down by 1.1% on FY19.

The company declared a final dividend of 5.0 cps, taking the total FY20 dividend to 9.0 cps, in line with the previous year. At the end of FY20, the company had a robust balance sheet with a net cash position of $19.5 million, comprising cash-on-hand of $79.5 million less borrowings of $60.0 million.

During FY20, the company successfully secured over $200 million in future annual revenues through contract extensions or new agreements across its utility operations. The company secured and mobilized new long-term contracts with Sydney Water and Queensland Urban Utilities during FY20.

FY20 Results Summary (Source: Company Reports)

Rise in Telecommunications EBITDA: EBITDA from Telecommunications segment stood at $83.1 million in FY20, up 7.8% on the previous year, supported by adoption of AASB 16, the profitable wind-up of nbn D&C operations and favourable O&M work mix. Revenue from the Telecommunications segment stood at $544.2 million in FY20, down $45.2 million on the previous year, due to the change to successful conclusion of the Company’s nbn D&C operations in addition to clients delays in commencing a number of wireless projects due to the COVID-19 pandemic.

Telecommunication EBITDA Trend (Source: Company Reports)

Increase in Utilities Revenue: The revenue from the Utilities segment stood at $384.1 million in FY20, up 45.3% on the previous year, due to the inclusion of a full year of revenue from Comdain Infrastructure. Further, the company reported EBITDA Margins of 8.0% for Utilities segment, in-line with the Management’s expectations.

Utilities Revenue Trend (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 29.36% 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 FY20, the company’s gross margin stood at 94.1%, higher than the industry median of 14.7%. For the same period, the company’s net margin stood at 5.3%, higher than the industry median of 2.7%. The company has an ROE of 15.7%, higher than the industry median of 10.0%. Further, the company has a current ratio of 1.43x, higher than the industry median of 1.09x, demonstrating that the company is well equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

History of Paying Regular Dividends: The company has a decent track record of paying regular dividends to its shareholders. The company has recently declared a final dividend of 5 cps, taking the total FY20 dividend to 9 cents per share, reflecting payout ratio of 74.2% based on Statutory EPS. The final dividend is payable on 1 October 2020. From 2016 to 2020, the company’s dividend has increased at a CAGR of 37.74%.

Dividend Trend (Source: Company Reports)

Secured Multi-Year Agreement with NBN: The company recently announced that it has secured a multi-year agreement with nbn Co. (nbn) for the provision of network operations, maintenance and optimisation services to its multi-technology National Broadband Network. This agreement demonstrates the confidence that nbn has in SSM’s ability to provide critical network maintenance and upgrade services to the NBN. Under this long-term agreement, SSM will perform operations and maintenance activities across core network technologies, as well as other technologies that may be introduced in the future.  

Limited Impacts from COVID-19: Although the company’s exposure to essential infrastructure networks provided resilience against COVID-19 impacts, the company witnessed some impacts from COVID-19 pandemic. Due to uncertainty at the time of the pandemic, the incurred additional costs for the implementation of safety-related protocols across business operations and experienced delays in some projects due to government-imposed restrictions. The company also experienced reduced residential land development activity due to COVID-19 impacts. Although, till now the impacts have not been significant, further escalation in the extent and duration of the COVID-19 pandemic, could significantly impact the company operations.

What to Expect: Looking ahead, SSM is focused on securing organic growth opportunities from a significant and expanding internal pipeline; re-securing agreements which are due to expire, and further progressing strategic growth opportunities aligned to its core sectors, supporting ongoing growth and diversification. The company will continue its search for external market opportunities supporting further growth and diversification of revenue.

SSM expects continued demand for its services across Utilities and Telecommunications industries. In FY21, the company expects its earnings to remain resilient, supported by its long-term contracts, subject to continued work volumes from clients across existing contracts and resumption of programs of work previously delayed by clients due to COVID-19 restrictions. One of the key priorities of FY21 is to implement the ERP system into the Comdain Infrastructure business to support sustainable growth in years to come. With a robust balance sheet, and strong base of contracted revenues across utility and telecommunications sector, the company seems to be well placed to navigate through the uncertain Covid-19 pandemic.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation Approach (illustrative)

EV/EBITDA Multiple Based Relative Valuation Approach (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 provided a return of ~24.92% in the past six months and 8.56% in the past three months. Currently, the stock is trading slightly lower than the average 52 weeks price level band. The company currently has a market capitalisation of ~$829.66 million with an annual dividend yield of 4.43% and PE multiple of 16.740x. On the technical analysis front, the stock has a support level of ~$1.8 and resistance of ~$2.23. We have valued the stock using EV/EBITDA multiple based illustrative valuation method and have arrived at a target price of low double digit-upside (in % terms). For the purpose, we have taken peers like Vocus Group Ltd (ASX: VOC), Macquarie Telecom Group Ltd (ASX: MAQ), and Uniti Group Ltd (ASX: UWL), etc. Considering the decent performance in FY20 amid COVID-19 pandemic, robust balance sheet position with net cash of 19.5 Mn in FY20, decent track record of paying dividend to its shareholders, its exposure to essential network services to the telecommunications and utility sectors, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $2.02, down by 0.493% on 24 September 2020.

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

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