Service Stream Limited

SSM Details

Management Update: Service Stream Limited (ASX: SSM) engages in telecommunications and utilities for infrastructure-based industries that provide maintenance, installation, construction services, wireless telecommunication, specialist inspection., etc., in Australia. Recently, Elizabeth Ward has joined the Board as an Independent Non-Executive Director of the company.

FY21 Financial Performance:

• The company has recorded a decline in its total revenue by 13.4% to $804.2 million in FY21, compared to $929.1 million in FY20, impacted due to a reduction in the Telco segment by $151.8 milllion due to lower NBN volumes.
• However, the Utility segment was up by over $27.5 million, led by Comdain revenue growth of 11.0%.
• The company has reported an EBITDA of $75.2 million in FY21, compared to $105.6 million in FY20.
• SSM has reported a decreased net profit by 20% to $29.3 million in FY21 against $49.3 million in FY20. The impact on profit is due to a slight increase in interest expense reflective of increased debt facilities, leases and further, increased depreciation on leased assets.
• The cash position of the company stood at $50.6 million as of 30 June 2021.

Operating Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Impact of COVID-19 pandemic- The company has faced challenges due to a reduction in telecommunication works that has impacted its financials, and, still, the uncertainty prevails.
• Climatic Risk: The company is exposed to climatic risk, which is uncertain and could impact the company's operational activity.

Outlook:

• The company has expected from Lendlease Services acquisition to generate cost synergies across the combined group of ~$17 million and further, estimated pro forma FY22 EBITDA from operations of $120-125 million.
• A significant increase in private and public investment in infrastructure assets is expected to drive demand growth for maintenance services in the long term.
• The company has re-secured major contractual agreements that could support a strong core earnings base in the future.

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 Recommendation: As per a recent update, the company has announced acquiring Lendlease Services that would support the Group’s diversification and growth strategy of expanding operations. The stock of SSM is trading below its average 52-weeks' levels of $0.817-$2.431. The stock of SSM gave a positive return of ~0.591% in the past one week and a negative return of ~54.67% in the past one year. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight discount to its peers' average, considering the uncertainty of the COVID-19 pandemic, decrease in topline and bottom-line growth. For the purpose of valuation, peers such as SRG Global Ltd (ASX: SRG), GenusPlus Group Ltd (ASX: GNP), Southern Cross Electrical Engineering Ltd (ASX: SXE) have been considered. Considering the current trading levels, indicative upside in valuation, decent balance sheet, strategic acquisition, increase in revenue of utilities segment, optimistic outlook, we recommend a ‘Speculative Buy' rating on the stock at the current market price of $0.845, down by ~2.874% as on 8 September 2021.

SSM Daily Technical Chart, Data Source: REFINITIV 

CIMIC Group Limited

CIM Details

CIMIC Group Gained Contracts: CIMIC Group Limited (ASX: CIM) operates in construction, mining, services, and public-private partnerships services to infrastructure, include rail and road developments, social infrastructure projects, and PPP projects in Australia, Asia, and the Middle East, the Americas, and Africa.

• Cimic’s Leighton Asia, UGL and Broad Construction, has gained contracts worth ~ $145 million in Hong Kong and Australia and expects to complete the projects in 2022.
• Further, the second building project was from the Phoenix Group to deliver a commercial complex in Hyderabad, India, worth $140 million, which is expected to commence in October 2021 and be complete in Q2 2023.
• CIMIC Group’s UGL has achieved two contracts’ extensions, expected to generate ~$160 million of revenue. In addition, it received a contract of the Auckland passenger rail network in New Zealand worth NZ$600.

H1FY21 Financial Performance:

• The Group has recorded revenue growth of 10.6% to $7,127.4 million in H1FY21 (including revenue from JV), compared to $6,443.2 million in H1FY20, supported by the growth in Ventia following the acquisition of Broadspectrum.
• The company has reported an improved EBITDA of 5.1% to $464.5 million in H1FY21 against $442.0 million in H1FY20.
• The company has reported a profit of $208.0 million in H1FY21, up by 1.3% compared to $205.3 million in H1FY20, driven by strong Australian Construction and Services revenue.

Revenue Trend (excluding JVs) (Source: Analysis by Kalkine Group)

Key Risks:

• Impact of COVID-19 pandemic- The company has faced with the challenge of delay in projects during the COVID-19 pandemic that has impacted its operations, and still, the uncertainty prevails.
• Foreign Currency Risk- The company’s operations are exposed to the global market, due to which the company could face the foreign currency risk.

Outlook:

• The government stimulus packages in core construction and services markets bring an opportunity through a strong PPP pipeline.
• The company has guided its FY21 NPAT to be maintained at $400-$430 million.
• CIM has offered to acquire the remaining shares of Devine Limited and further signed a $1.4bn three-year syndicated performance bond facility.
• The company has strategized to expand in the services industry, therefore, acquired Innovative Asset Solutions in 2Q21.

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 Recommendation: As per a recent update, the company has declared an interim dividend of 42c per share, representing a payout ratio of 62.8% of the H1FY21 result. The stock of CIM is trading below its average 52-weeks' levels of $16.860-$27.510. The stock of CIM gave a negative return of ~19.37% in the past nine months and a positive return of ~14.04% in the past six months. On a technical analysis front, the stock of CIM has a support level of ~$20.36 and a resistance level of ~$26.52. The stock has been valued using EV/Sales multiple-based illustrative relative valuation and arrived at a target price of low double-digit upside (in % terms). The company might trade at a slight premium to its peers' average, considering the strategic investment, increase in topline and bottom-line growth. For the purpose of valuation, peers such as Monadelphous Group Ltd (ASX: MND), Downer EDI Ltd (ASX: DOW), Johns Lyng Group Ltd (ASX: JLG) have been considered. Considering the current trading levels, expected upside in valuation, government stimulus package, strategic expansion in the service industry and award of new projects, we recommend a 'Hold' rating on the stock at the current market price of $21.800, up by ~1.113% as on 8 September 2021.

CIM 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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