Service Stream Limited

SSM Details

Chairman’ Address to Investors: Service Stream Limited (ASX: SSM) provides services essential network services to telecom companies and construction services to utilities. In a recent address to the shareholders, the management highlighted the following activities undertaken during FY21 and in the pipeline for FY22: 

• Plans to Diversify: Post-acquisition of the Lendlease Services’ business, SSM plans to foray into industrial, transportation, powerline operations, and maintenance activities. It will also strengthen its current capabilities in gas, water, and telecommunications.
• Growth of Comdain Segment: The FY21 performance was driven by an 11% YoY rise in the Comdain Infrastructure revenue, higher EBITDA to OCFBIT (Operating cashflow before interest & tax) conversion (99.0% in FY21 Vs. 81.9% in FY20), and renewal of all major contracts for the Telecommunications Division.
• Work Pipeline: The company has contracted a backlog of works greater than ~$5.8 billion in FY21.

Cash & Cash Equivalents Highlights; (Analysis by Kalkine Group)

Key Risks: the company faces the risk of integration, accrual of synergies, the impact of COVID-19 lockdowns, and concentration of revenue from key customers.

Outlook:

• The company maintains the $120-125 million guidance of Pro-forma EBITDA from Operations including $17 million synergies post-acquisition of Lendlease Services’ business. It expects FY22 standalone earnings below FY21, consistent with the Telecom agreements obtained in FY21.
• The company expects to complete the ongoing Lendlease Services’ acquisition around November 2021.

Valuation Methodology: P/E 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 Recommendation: The stock of SSM gave a positive return of ~8.53% in the past month and a negative return of ~3.78% in the past three months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.735 - $2.431. The stock has been valued using the P/E multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount than its peers’ average P/E multiple, considering its impacted financial performance in FY21, COVID-19 uncertainty, and expected increase in debt due to the ongoing acquisition deal. For this purpose of valuation, few peers like MAAS Group Holdings Limited (ASX: MGH), CIMIC Group Limited (ASX: CIM), Monadelphous Group Limited (ASX: MND), have been considered. Considering the current trading levels, improved cash flow conversion in FY21, robust industry sector fundamentals, FY21 contracted works’ backlog, and valuation, Comdain’s growth expected in FY22, portfolio expansion through Lendlease Services’ acquisition, and associated business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.885, as of 27 October 2021, 11:35 AM (GMT+10), Sydney, Eastern Australia.

Daily Technical Chart – SSM

Source: REFINITIV  

Aeris Environmental Limited (ASX: AEI)

Aeris Environmental Limited (ASX: AEI) engages in the R&D and commercialisation of its proprietary technologies. AEI markets disinfectant products that provide HVAC/R hygiene technology and anti-corrosion services. Its market capitalization stood at ~AUD 31.69 million as of 27^th October 2021.

Financial & Operational Updates – The company reported a 50% YoY decline in revenue to ~AUD 7.33 million in FY21 due to lower revenue from sales and services. AEI held ~AUD 11.48 million in cash and cash equivalents as of 30 June 2021. The cash outgoings were reduced to ~AUD 1.27 million in FY21 from ~AUD 2.05 million in FY20. Currently, AEI is finalising a comprehensive strategic business review for commercialising its core product platforms, the launch of new products. AEI has recruited senior personnel in sales & marketing, and focusing on Australia, and other overseas markets (China, etc.), and verticals. It is establishing new trading terms with the distribution partners to solidify the business model.

Technical Analysis: AEI's prices are consolidating around a crucial support level AUD 0.130 with a positive bias, indicating the possibility of an upside reversal. On the daily chart, the leading indicator RSI (14-period) is hovering around mid-point and currently trading at ~41.93 levels. However, the trend-following indicators 21-period SMA and 50-period SMA are sustaining above the CMP with narrow margins and may act as the resistance levels for the stock. Now an immediate resistance level for the stock appears at AUD 0.155 while support is at AUD 0.116 level.

The investment in new products, revamped leadership team, reorganised commercial activities to expand in China, and current trading levels, suggest a ‘Speculative Buy’ stance for the investors with a high-risk appetite, keeping the support and resistance levels as crucial points. The stock was analysed as per the closing market price of AUD 0.130 per share as of 27^th October 2021. However, the risk levels are high considering the environmental concerns, global exposure of operations, the COVID-19 led supply chain issues, customer demands & pricing, lockdowns’ induced uncertainty in key markets.

Investors can consider exiting from the stock if the Resistance levels mentioned as per the technical analysis have been achieved and are subject to the factors discussed above.

Daily Technical Chart – AEI

Source: REFINITIV

XTEK Limited (ASX: XTE)

XTEK Limited (ASX: XTE) supplies tailored solutions to the law enforcement & Defence bodies in Australasia and develops and commercialises XTclave and XTatlas technologies. XTE also provides a SUAS (Small Unmanned Aerial Systems) network for the software applications of XTatlas. Its market capitalization stood at ~AUD 21.98 million as of 27^th October 2021.

Financial & Operational Updates – On 11^th October 2021, XTE raised ~AUD 2.7 million via the issuance of 10.38 million shares under an institutional placement. The company plans to raise up to ~AUD 5 million via a non-renounceable Entitlement Offer (11^th October 2021 – 25^th October 2021) at AUD 0.26 per share. XTE offered shares in the ratio of 3.7:1 to eligible shareholders and will issue shares on 1^st November 2021. XTE will deploy funds for the development of a small VTOL (vertical take-off and landing) UAV (Unmanned Aerial Vehicles), software applications for XTatlasTM, expansion of the ballistics range, and meeting working capital needs. On 19^th October 2021, Altor Capital Pty Limited increased its voting power to ~11.94% in XTE. On 12^th October 2021, HighCom Armor Solutions, Inc. (US subsidiary) obtained ~AUD 1.5 million purchase order from a Federal US department for its specialist ballistic armour products, expected to deliver in Q2-Q3FY22.

As per an Investor Briefing Presentation released on 4 October 2021, XTE reported ~AUD 0.24 million cash as of 22 September 2021 versus ~AUD 5.90 million as of 30 June 2021. The creditors reduced to ~AUD 1.38 million as of 22^nd September 2021 compared to ~AUD 6.99 million as of 30 June 2021. For FY21, the revenue declined by 34% YoY to ~AUD 28.33 million from ~AUD 42.71 million in FY20. XTE incurred ~AUD 3.95 million net loss in FY21 versus ~AUD 0.3 million net profit in FY20. However, the company curtailed its net cash outflows from ~AUD 4.54 million in FY20 to ~AUD 286,000 in FY21.

Technical Analysis: On a daily chart XTE stock price are trading above the falling trend line support level at AUD 0.245 and continuously taking support of the same. Now, the prices are consolidating at lower levels and moving up gradually. The leading indicator RSI (14-period) is trading in an oversold zone at (~ 27.05 level) and which might indicate the possibility of a rebound from the lower levels. An important support level for the stock, is placed at 0.242 while the key resistance level is placed at AUD 0.320.

With the recent capital raising, $10 million investment in the Adelaide armour manufacturing facility, and the current trading levels of XTE suggest a ‘Speculative Buy’ stance for the investors with a high-risk appetite, keeping the support and resistance levels as crucial points. The stock was analysed as per the closing market price of AUD 0.270 per share as of 27^th October 2021. However, the risk levels are high considering the impacted financial results, and delays in starting armour plates’ full commercial production at the Adelaide facility in FY21.

Investors can consider exiting from the stock if the Resistance levels mentioned as per the technical analysis have been achieved and are subject to the factors discussed above.

Weekly Technical Chart – XTE

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 for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting from the stock if the Target Price mentioned as per the Valuation has been achieved and subject to the factors discussed above.

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 the uptrend may take a pause due to profit booking or selling interest. 

The Green colour line reflects the 21-period moving average. SMA helps to identify existing price trend. If the prices are trading above the 21-period, then it shows prices are currently trading in a bullish trend, (Vice – Versa).

The Blue colour line reflects the 50-period moving average. SMA helps to identify existing price trend. If the prices are trading above the 50-period, then it shows prices are currently trading in a bullish trend, (Vice – Versa).

The Purple colour line in the chart’s lower segment reflects the Relative Strength Index (14-Period) which indicates price momentum and signals momentum in trend. A reading of 70 or above suggests overbought status while a reading of 30 or below suggests an oversold status.

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