Service Stream Limited

SSM Details

Change in Substantial Holding: 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. TIGA Trading Pty Ltd, one of the substantial holders of Service Stream Limited, has increased its holding in the company from ~5.64% to ~7.35%.

Acquisition of Lendlease Services: On 21 July 2021, the company announced that its subsidiary, Service Stream Holdings Pty Ltd, has agreed to acquire 100% of Lendlease Services Pty Ltd (Lendlease Services) for an enterprise value of $310 million. The acquisition is expected to be completed by around November 2021.  

Rationale for Acquisition:

• The acquisition will enhance SSM’s capabilities and expand its addressable markets.
• The acquisition is expected to deliver strong EPS-A accretion of ~30% on FY22 pro forma (FY22PF) basis.
• The acquisition is expected to deliver Synergies of around $17 million per annum, with approximately 50% expected to be realised on a run-rate basis within 12 months of completion.

$185 million Equity Raising: In order to fund the acquisition, the company has announced a $185 million equity raising. Under the Placement and Institutional Entitlement Offer, SSM has received commitment to raise ~$130 million, and it is now raising a further ~$55 million via a Retail Entitlement Offer, which opened on 27 July 2021 and will close on 9 August 2021.

FY21 Results Highlights: As per the company’s unaudited FY21 results, its FY21 revenue declined by 13.4% YoY to $804.4, impacted by lower Telco segment revenue and reduced activation and assurance volumes. EBITDA from operations declined by 25.7% YoY to $80.3 million in FY21.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the risks of COVID-19 pandemic as it could cause increased restriction of workforce movement, and reduction in demand from the company’s customers, which may impact the company’s operations. The rate of adoption of new technology by the company’s customers, such as 5G technology, can also provide variability against expected future earnings.

Outlook: In a business update provided in June 2021, SSM’s Board assured that the fundamentals of the company’s business model are strong, supported by growing organic business development pipeline. SSM is currently well placed with a balanced and stable portfolio of long-term contracts. The acquisition of Lendlease Services is expected to provide additional scale to SSM and will also diversify its revenue.

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (Illustrative)

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: Over the last three months, the stock has corrected by 5.93% and is trading lower than the average 52-week price level band of $0.817 and $2.431, offering a decent opportunity for accumulation. We have valued the stock using an EV/EBITDA multiple based illustrative relative valuation method and arrived at a target price of low double-digit (in % terms). We believe that the company can trade at a slight premium compared to its peer's average, considering the improved current ratio, decline in debt-to-equity ratio, positive pipeline of new utility project opportunities in the utilities segment. We have taken peers like Telstra Corporation Ltd (ASX: TLS), Chorus Ltd (ASX: CNU), TPG Telecom Ltd (ASX: TPG), among others. Considering the expected benefits from the acquisition of Lendlease Services, and strong support received for the Placement and Institutional Entitlement Offer, robust contract pipeline, current trading level, valuation and key risks associated with the business, we give a “Speculative Buy” rating on the stock at the current market price of $0.900, down by ~1.099% as on 9^th August 2021.

SSM Daily Technical Chart, Data Source: REFINITIV

Zoono Group Limited 

ZNO Details

June 2021 Quarter Highlights: Zoono Group Limited (ASX: ZNO) is a global biotech company that manufactures and distributes scientifically validated, long-lasting and environmentally friendly antimicrobial solutions. For the June quarter, the company reported cash receipts of NZ$3.07 million, taking the total FY21 cash receipts to NZ$30.45 million.

• Commenced Selling in France: In June 2021 quarter, the company started selling to customers in France, with several French multinational customers now on board.
• New Distribution Agreements in China: During the quarter, ZNO signed three new distribution agreements in China, with NZ$10m in minimum contracted sales targets over the next 18 months.
• Positive Test Results for Zoono Z71 Effectiveness: Further testing of Z-71 Microbe Shield proved 99.99% efficacy against Coronavirus MHV-3 after 30 days.

H1FY21 Result Highlights:

• Increase in Revenue: Revenue for H1FY21 stood at NZ$14.42 million, up by NZ$12.7 million (741%) on pcp, supported by the decent growth across its key metrics and continued its global expansion.
• Rise in Operating EBITDA: Operating EBITDA for H1FY21 stood at NZ$2.9m, up 541% on pcp.
• Improved Cash Balance: As at 31 December 2020, the company had a cash balance of NZ$7.3 million, up from NZ$2.7 million as on 31 December 2019.

Revenue Trend (Source: Analysis by Kalkine Group)

Key Risks: The company is exposed to the risks related to the delay or failure to obtain any regulatory approval. The company is also exposed to the risks related to fluctuations in the foreign currency exchange rates.

Outlook: Looking ahead, the company expects to witness a steady increase in its sales volumes, resulting from the scientific study data now available and the advanced application protocols now in place. The company’s outlook is also supported by the increased client awareness and the level of engagement achieved with quality partners globally.

Stock Recommendation: The company’s stock has been corrected by 7.9% in the last three months and is currently trading lower than the average 52-week price level band of $0.585 - $2.710, offering a decent opportunity for accumulation. On a TTM basis, the stock is trading at an EV/Sales multiple of 2.1x, lower than the industry average (Personal & Household Products & Services) of 4.1x, demonstrating that the stock might be undervalued. Considering the company’s improved H1FY21 results, decent progress in the June 2021 quarter, expected increase in sales volume, current trading level, valuation on TTM basis, and key associated risks, we give a “Speculative Buy” rating on the stock at the current market price of $0.635, as on 09 August 2021, 3.30 PM (GMT+10), Sydney, Eastern Australia.

ZNO Daily Technical Chart, Data Source: REFINITIV

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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