Company Overview: Service Stream Limited (ASX: SSM) is a leading essential network services company that delivers a variety of services across electricity, gas, water and renewable energy utilities, and fixed and wireless telecommunication networks. The company is specialised in the designing, construction, operation and maintenance of critical assets. SSM has a proven capability and scalability to take on large, complex and high-volume projects. SSM was listed on ASX in the year 2004. The company’s vision is to be a leading essential network service provider across the telecommunication and utility industries.

SSM Details

Focused on Securing Ongoing Growth Opportunities: Service Stream Limited (ASX: SSM) is a leading essential network services company that provides integrated end-to-end asset life-cycle services across essential infrastructure networks within the Telecommunications and Utilities sectors. The company’s utility network teams provide engineering, asset and customer management services to Australia’s leading utilities. For telecommunication industries, SSM provides a variety of services ranging from constructing state-of-the-art broadband networks to maintaining and upgrading existing infrastructure. The company is focused on building and maintaining positive client relationships, optimising its operational delivery model, and securing growth opportunities. Over the last five year (2016 to 2020), the company’s revenue and NPAT have grown at a CAGR of 20.6% and 25.3%, respectively.

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

As an essential service provider to utility and telecommunication asset owners, SSM is well-placed to navigate through the ongoing COVID-19 crisis and to grow and diversify its operations. Looking ahead, the company is focused on identifying and securing ongoing growth opportunities across its core markets, while continuing to deliver decent and sustainable results for its shareholders. Further, SSM intends to maintain its expansive client base of leading network owners and operators, regulators and government organisations. The company’s earnings in FY21 are expected to remain resilient, supported by its long-term contracts.

FY20 Result Highlights: Despite the challenges of COVID-19 pandemic, SSM’s revenue grew by 9% (YoY) to a record $929.1 million in FY20. Under the telecommunication segment, the company reported revenue of $544.2 million, down by $45.2 million on pcp, due to successful conclusion of nbn D&C operations, and minor COVID-19 related impacts. Under the utilities segment, the company reported revenue of $384.1 million, up by 45.3% on pcp, due to the full-year inclusion of Comdain Infrastructure, with some minor COVID impacts in 2H20. During FY20, the company was benefitted from its exposure to essential infrastructure networks which provided a solid revenue base and resilience against the impacts of the COVID-19 pandemic. The company witnessed an increase of 15.9% (YoY) in EBITDA from operations which stood at $108.1 million in FY20. Decent operating cashflows during the year allowed SSM to finish the year with a net cash balance of $19.5 million, up 85.1% on Y-o-Y basis.

FY20 Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 32.09% of the total shareholding. Coen (Thomas) and TIGA Trading Pty Ltd. hold maximum interest in the company at 9.38% and 5.33%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: During FY20, gross margin of the company stood at 94.1%, which is higher than the industry median of 14.7%. In the same time span, EBITDA margin and net margin of the company were 11.5% and 5.3%, higher than the industry median of 6.9% and 2.8%, indicating higher profitability. ROE for FY20 stood at 15.7%, higher than the industry median of 9.1%. This suggests that the company is well managing the capital of its shareholders and can generate profits internally. The current ratio of the company stood at 1.43x in FY20, higher than the industry median of 1.4x, demonstrating that the company is well-equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Dividend History: SSM has a decent  track record of paying regular dividend to its shareholders. Over the last five years (2016 to 2020), the company’s dividend has increased at a CAGR of 37.74%. For FY20, the company has paid a final dividend of 5 cents per share on 1 October 2020, bringing the full-year dividends to 9 cents per share fully franked, in-line with the prior year. FY20 dividend represents an increased dividend payout ratio of 74.2% based on statutory EPS.  The annual dividend yield of the company is about 3.92% on a five-year average basis (FY16-20). Based on continuing ability to support growth and expansion opportunities across its core markets, we presume that the company will continue to maintain its dividend payout ratio with a dividend yield of >3.0% in future which might attract the attention of the market players.

Dividend and Dividend Payout Ratio Trend (Source: Company Reports)

SSM Extends OMMA with nbn: On 13 October 2020, the company announced that it has extended its Operations and Maintenance Master Agreement (OMMA) with NBN Co. for an additional 6-month period from the end of December 2020, demonstrating nbn’s continued confidence in SSM to support its national operations and the enhancement of its customers’ experience as they connect to the National Broadband Network. Under the contract, SMM will provide operations and maintenance field services for nbn, including service activations and service assurance activities.

Secured Multi-year Service Agreement with nbn: On 16 December 2020, SSM announced that it has secured multi-year Unified Field Operations (Services) Agreement with nbn for the provision of service activations, operations and maintenance services to its multi-technology National Broadband Network. Under the agreement, SSM will be responsible for performing activation, operations and maintenance activities across core network technologies. Although the agreement is for an initial period of four years, the company has an option of two x two-year extension. In the first year, Unify Services is expected to generate around $70 million of revenue for the company. In subsequent years, the revenue will be dependent on annual work volumes.

Vanguard Group Became Substantial Holder: On 18 December 2020, Vanguard Group became a substantial holder in the company by holding 5.001% voting power in the company. Vanguard Group now holds 20,492,042 ordinary shares in the company.

Key Risks: The COVID-19 pandemic and any escalation of the government’s response, including increased restriction of workforce movement, increased safety protocols, and reduction in demand from the company’s customers may impact SSM’s operations. Further, the company is exposed to the risks related to the customer concentration, changes in customer demand, retention of key personnel and sourcing of subcontractors, and digital disruption.

Outlook: The company’s exposure to essential infrastructure networks has provided it with a decent revenue base and resilience against COVID-19 pandemic uncertainties. In FY21, the company expects continued demand for its services across critical infrastructure networks throughout the Utilities and Telecommunications industries. The company’s annual earnings are expected to remain resilient, supported by its long-term contracts. At the recently held AGM, the Management informed that FY21 results would be more noticeably biased to second half than in prior years, reflecting an easing of COVID-19 restrictions towards the end of the year, expected resumption of slowed proactive maintenance programs across each division, progressive growth of work programs during the year, and new projects being secured and mobilised across each operating division.

Looking ahead, the company is focused on securing organic growth opportunities across its core markets and assessing external market opportunities that support further growth and diversification of Group revenue. With a decent balance sheet, cashflow and liquidity, the company is well-placed to pursue growth and expansion opportunities across its core markets.

Key Valuation Metrics (Source: Company Reports)

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: Over the past one month, the stock of SSM has corrected by ~26.56%, there are investment risks that needs to be evaluated from market volatility perspective and uncertainty arising due to the current market sentiments. On the technical analysis front, the stock has a support level of ~$1.549 and resistance of ~$2.234. We have valued the stock using EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers like Chorus Ltd (ASX: CNU), Uniti Group Ltd (ASX: UWL), Vocus Group Ltd (ASX: VOC), etc. Considering the company’s decent performance in FY20, the pipeline of telecommunication maintenance and project-related works, track record of paying regular dividends, robust balance sheet, current trading levels, and valuation, we give a “Buy” recommendation for the stock at the current market price of $1.755, up by 1.739% on 14 January 2021.

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

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