Service Stream Limited

SSM Details

Acquisition of Lendlease Services: Service Stream Limited (ASX: SSM) provides services to infrastructure-based industries, mainly in the telecommunications and utilities sectors. Allan Gray Australia Pty Ltd and its related bodies corporate have become a substantial holder in the company with a voting power of 5.09% on 17 September 2021. During FY21, the company reached a binding agreement for the acquisition of Lendlease Services, which is likely to diversify revenues, improve current capabilities and expand the Combined Group’s addressable markets.

• The enterprise value for the acquisition stood at $310 million, and SSM is expected to pay a purchase price of ~$295 million once adjustment for debt and debt-like items are considered.
• To finance the acquisition, the company successfully raised $185 million through equity and $123 million from debt facilities.
• The transaction is likely to complete around November 2021, which is subject to customary completion conditions precedent, including client consents.

FY21 Financial Summary:

• Fall In Revenue: During FY21, the company recorded revenue amounting to $804.2 million against $929.1 million in FY20. SSM posted a fall of 27.9% in revenue of the telecommunication division to $392.4 million due to the end of the NBN design and construction program in FY20.
• EBITDA in Line with Guidance: SSM’s EBITDA from Operations amounted to $80.1 million, which was in line with the guidance for the year.
• Decrease in Profits: Net profit after tax (NPAT) for the year stood at $29.3 million against $49.3 million in FY21. The fall in the bottom line was mainly due to the reduction in revenues.

Revenue & EBITDA (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 Disruptions: The company witnessed an unprecedented level of uncertainty in relation to the COVID-19 pandemic in FY21, and the company continues to expect some risks to near-term performance.
• Customer Concentration: SSM’s source of revenue and profitability is dependent on a small number of key customers and infrastructure programs, mainly within the telecommunications sector. Hence this may impact the company’s financial health.

Outlook:

• The company possesses future contracted (excluding extension options) work in hand in excess of $2.0 billion.
• SSM anticipates post-acquisition pro forma FY22 EBITDA from Operations in the range of $120 - $125 million, and its FY22 standalone earnings are likely to be rebased below FY21, which is in line with the Telecommunication contracts secured during FY21.
• The company has scheduled to conduct the 2021 Annual General Meeting on 20^th October 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: During FY21, the company decided not to declare a final dividend to aid funding of the Lendlease Services acquisition. SSM closed FY21 with a net cash position of $15.6 million, which comprised of cash-on-hand of $50.6 million and net of borrowings of $35.0 million. The stock is trading below its 52-week low-high average of $0.735 - $2.431, respectively. The stock of SSM has been corrected by ~6.15% and ~8.01% in the past three and six months, respectively. The stock has been valued using the P/E multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company can trade at a slight discount to its peers’ average P/E multiple, considering the COVID-19 disruptions, declining bottom line as well as falling ROE. For this purpose of valuation, peers such as CIMIC Group Ltd (ASX: CIM), Monadelphous Group Ltd (ASX: MND), Lycopodium Ltd (ASX: LYL), and others have been considered. Considering the expected upside in valuation, decent liquidity position, deleveraged balance sheet, expected synergies from the acquisition, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.910, down by ~1.087% as on 18^th October 2021.

SSM Daily Technical Chart, Data Source: REFINITIV 

CountPlus Limited

CUP Details

Partnership from Noida: CountPlus Limited (ASX: CUP) operates professional accounting and financial services businesses. As announced on August 31, 2021, the company decided to acquire a 49% stake in a leading accounting firm “Southern Cross Business Holdings Pty Ltd (SCBA)” for a total purchase consideration of $2.793 million with an initial cash payment of $2.234 million. The remaining amount will be paid in deferred payment in 12 months.

FY21 Financial Summary:

• Strengthened Business Profile: For the year ended 30^th June 2021, the company recorded revenue amounting to $107 million against $102.3 million in FY20, reflecting a rise of 5% on a YoY basis. This showcased strength of the company’s business in the difficult time caused by the pandemic.
• Rise in Bottom Line: CUP posted a net profit after tax of ~$14.58 million against ~$12.98 million in FY20 and underlying EBITA lifted by 14%.
• Strong Balance Sheet: The company’s balance sheet was strong, evident by a net cash position of ~$21.91 million at the end of FY21.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Competitive Pressure: The company’s operational and financial health could be impacted by the rising competition from peers in the industry.
• Regulatory Risk: CUP is exposed to a more complex regulatory environment: any failure in the compliances could lead the business to fines, penalties etc.

Outlook:

• Looking forward, the company is continuing to build the capacity to undertake merger and acquisition opportunities at a time of unprecedented change in its core business segments.
• CUP is likely to witness the impact of the new Count Financial operating model in 2H FY22 or possibly 1H FY23.
• The company has scheduled to conduct the 2021 Annual General Meeting on 16^th 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: During FY21, CUP has carefully managed its balance sheet in order to remain in a solid position for future opportunities in the dislocating financial advice sector. As on 18^th October 2021, the stock has a support and resistance level of $0.834 and $1.028, respectively. The stock has been valued using P/E multiple-based illustrative relative valuation and arrived at a correction of high single-digit (in % terms). The company can trade at a slight premium to its peers’ median P/E Multiple, considering the rising revenue, strengthened balance sheet, and low debt to equity ratio. For the purpose of valuation, peers such as Kelly Partners Group Holdings Ltd (ASX: KPG), QANTM Intellectual Property Ltd (ASX: QIP), and IPH Ltd (ASX: IPH) have been considered. Considering the expected correction, negative margins in the business, negative ROE, and key risks associated with the business, we suggest investors to book profit and give a ‘Sell’ rating on the stock at the current market price of $0.900 as on 18^th October 2021.

CUP Daily Technical Chart, Data Source: REFINITIV 

Note: The purple colour line in the chart depicts RSI (14-period). 

Note 1: The reference data in this report has been partly sourced from REFINITIV.

Note 2: Investment decision 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 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 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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