Service Stream Limited

SSM Details

H1FY21 Financial Performance: Service Stream Limited (ASX: SSM) operates through four segments: Fixed Communications, Network Construction, Energy & Water, and Comdain Infrastructure segments. Its services comprise asset upgrade and replacement, engineering, design, and construction services for network assets. The market capitalisation of the company as of 29 June 2021 stood at ~$348.83 million. As per a recent financial update, the company has recorded a decline in EBITDA from operations to $40.2 million in H1FY21, compared to ~$58 million in H1FY20. Additionally, SSM incurred a loss after tax by 40.5% to $16.2 million in H1FY21 from $27.3 million in H1FY20, when reported on a statutory basis.  However, the operating cash flow was increased by 98.7% to $20.3 million in H1FY21 against $10.2 million in H1FY20. The cash position of the company stood at $50.4 million as of 31 December 2020, with a net cash position of $10.5 million.

H1FY21 Financial Performance (Source: Company Reports)

Outlook: The company has affirmed second-half EBITDA from Operations will be in line with the first-half result in FY21. SSM is focused on investing in solutions that improve customer experience, impact operational performance and support scalable growth. It will declare its FY21 full- year results on 26 August 2021.      

Key Risk: The Comdain is expecting to deliver approx. 10% revenue growth in FY21, which is less than the 15% guided at half-year due to recent floods, continued wet weather, and this has delayed some project works into FY22. In addition, due to the COVID-19 pandemic, the company has been impacted, including reducing energy disconnections, a material shortage that could impact the company's results in FY21.

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 Recommendations: As per a recent announcement, the company's share price is falling due to some external factor, but the board believes the fundamentals of the company are in place and prioritise to diversify group revenue from a strong telecommunications bias across broader essential infrastructure markets. As per ASX, the stock of SSM is trading below its average 52-weeks' levels of $0.830-$2.470. The stock of SSM gave a negative return of ~53.49% in the past one year and a positive return of ~0.58% in the past one weak. We have valued the stock using an EV/Sales multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at a slight discount to its peer average EV/Sales (NTM trading multiple), considering the subdued financial performance, impact of COVID-19 and delays in projects. For this purpose, we have taken peers such as Vocus Group Ltd (ASX: VOC), Telstra Corporation Ltd (ASX: TLC), NRW Holdings Ltd (ASX: NWH), to name a few. Considering the expected upside in valuation and current trading levels, decent balance sheet position, the projects in the pipeline, strategic investment in growth and outlook affirmation, we recommend a 'Buy' rating on the stock at the current market price of $0.865, up by 1.764% (as on 29 June 2021, 11:41 PM (GMT+10), Sydney, Eastern Australia).

SSM Daily Technical Chart, Data Source: REFINITIV 

Sunrise Energy Metals Limited

SRL Details

Business Update: Sunrise Energy Metals Limited (ASX: SRL) is an environmental and mining service company that provides metals recovery and industrial water treatment services and air purification. The market capitalisation of the company as of 29 June 2021 stood at ~$164.82 million. As per a recent announcement, SRL has appointed Mr Trevor Eton as Non-Executive Director to the company board, effective 1 July 2021. Mr Eton will chair the Audit, Finance and Risk Committee and be a member of the People, Governance and Sustainability Committee.

Q3FY21 Financial Performance: During the quarter, the company has successfully raised equity capital of $35 million. To expand its footprint, SRL has reached an agreement to acquire the Hylea Project, located in New South Wales, from Lotus Resources Limited. During the given period, the company has been awarded three water treatment projects in Queensland, Oman, and China. The company will acquire 100% interest in Exploration Licences EL8520, EL8641 and EL8801 for $2.5 million. The cash position of the company stood at $57.7 million as of 31 March 2021.

Q3FY21 Cash flow from Operating Activities (Source: Company Reports)

Outlook: SRL got significant interest from the automotive sector to secure a long-term supply of nickel and cobalt for their battery supply chains. The company will continue to engage with potential partners for its funding needs.

Key Risk: SRL faced challenges to fund the new projects due to the COVID-19 pandemic, which affected the company's operations. The company is exposed to technology risk, foreign currency risk, credit risk, climatic risk; therefore, the company should have adequate capital to mitigate the risk.

Stock Recommendation: As per a recent announcement, the company proposed a demerger of Clean TeQ Water from the Company's Water Business into a new stand-alone company and expecting the shares will commence trading on the ASX on or about 2 July 2021.  As per ASX, the stock of SRL is trading below its average 52-weeks' levels of $1.100-$3.850. The stock of SRL gave a negative return of ~18.69% in the past one month and a negative return of ~30.89% in the past nine months.

Considering the healthy balance sheet, award of projects, agreement to acquire the Hylea Project and the key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $1.855, up by 0.542% (as on 29 June 2021, 01:46 PM (GMT+10), Sydney, Eastern Australia). 

SRL 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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