Service Stream Limited

SSM Details

Finished Acquisition of Lendlease Services: Service Stream Limited (ASX: SSM) provides services to infrastructure-based industries, mainly in the telecommunications and utilities sectors. As announced on 1 November 2021, the company has wrapped up the acquisition of Lendlease Services Pty Ltd, which was announced on 21 July 2021 for an enterprise value of $310 million (prior to adjustments for debt and debt-like items).

• The acquisition was financed through a capital raising of $185 million as well as draw down of debt facilities and available cash.
• The combined group anticipates reporting FY22PF revenue of ~$1.7 billion and FY22PF EBITDA from operations of around ~$120-125 million, including the full-year pro forma run rate of synergies.

FY21 Financial Summary:

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

Revenue & NPAT Trend (Source: Analysis by Kalkine Group)

Key Risks:

• COVID-19 Disruptions: SSM 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.
• Digital Disruptions: Any advance change in technology may create business challenges in the market in which it operates.
• Customer Concentration: The company’s major revenue and profitability are 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 believes that its future growth would be supported by its blue-chip client base. In addition, the company has a combined backlog of contracted works of over $5.8 billion.

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 company settled 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 ~11.95% and ~8.98% in the past one month and three 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 and declining bottom line. For this purpose of valuation, peers such as CIMIC Group Ltd (ASX: CIM), Monadelphous Group Ltd (ASX: MND), and SRG Global Ltd (ASX: SRG) have been considered. Considering the expected upside in valuation, synergies from the recent acquisition, decent liquidity position, low debt to equity ratio, 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 $0.810, as on 22 November 2021, 1:39 PM (GMT+10), Sydney, Eastern Australia.

SSM Daily Technical Chart, Data Source: REFINITIV   

Fluence Corporation Limited

FLC Details

Q3FY21 Financial and Operational Summary: Fluence Corporation Limited (ASX: FLC) is engaged in the delivery of innovative, cost-effective decentralized water, wastewater, and reuse solutions for businesses and communities globally. During the quarter ended 30 September 2021, the company inked a Joint Development Agreement with Beijing Enterprises Water Group Investment Limited in order to focus on optimizing Aspiral MABR plants with an objective to jointly sell MABR plants globally. In addition, FLC witnessed Strong Adoption of MABR SPS with sales of 44 MABR plants year to date, which included recent Cambodia order and brought the total sales to 290 globally.

• FLC recorded revenue amounting to US$20.0 million during the quarter, reflecting a rise of 46% over Q3FY20.
• During the three-month period, the company recorded an improvement in operating cash outflow to US$2.0 million against US$5.9 million in Q3FY20.
• FLC recorded an improvement in its costs, evident by a fall of 14% in operating expenses as compared to Q3FY20.
• As announced on 12 November 2021, FLC won an US$8.5 million contract to build a third SUBRE plant using MABR technology in Sihanoukville, Cambodia, from the Cambodian Government’s Ministry of Land Management, Urban Planning and Construction. The company is likely to commence operations in 1HFY22.

Operating Cash Outflow (Source: Analysis by Kalkine Group)

Key Risks:

• Competition from Peers: The company operates in a very competitive environment. Hence rising market share of the peers could impact the operation and financial performance of the company.
• Forex Headwind: The company’s business is exposed to a risk arising from the adverse movement in the foreign currency as it operates in multiple geographies.

Outlook:

• Looking forward, the company strategic focus revolves around recurring revenue opportunities in the USA. FLC is also seeking to secure new contract wins in markets such as the US, Asia, and the Middle East.
• FLC is well-positioned for growth and reiterates guidance for SPS sales in the ambit of US$35 – US$50 million and anticipates reporting positive underlying EBITDA 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 Recommendation: The company closed Q3FY21 with cash and cash equivalents of US$16.3 million. The stock of FLC is trading near to its 52-week low level of $0.160, offering a decent opportunity for accumulation. The stock has been corrected by ~2.77% and ~10.25% in the past one and three months, respectively. 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 can trade at a slight discount to its peers’ average EV/Sales multiple, considering the high debt to equity ratio and material business risks such as competition and regulatory. For the purpose of valuation, peers such as Korvest Ltd (ASX: KOV), Zicom Group Ltd (ASX: ZGL), Amaero International Ltd (ASX: 3DA) and others have been considered. Considering the expected upside in valuation, growing quarterly revenue, increasing sale of MABR plants, acquisition of new contracts, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.175, down by ~2.778% as on 22 November 2021.

FLC Daily Technical Chart, Data Source: REFINITIV  

Decmil Group Limited

DCG Details

FY21 Financial Summary: Decmil Group Limited (ASX: DCG) primarily provides services such as designing, engineering, construction and maintenance to the Infrastructure, Resources, Energy and Construction sectors throughout Australia. During FY21, the company delivered on existing contracts during volatile macroeconomic conditions. DCG also secured new work with blue-chip customers in a diverse range of sectors in Australia.

• Decline in Revenue: As a result of delays and shifts of numerous contracts caused by COVID-19, the company recorded a fall in normalised revenue to $313 million against $451.3 million in FY20.
• Turnaround in EBITDA: Backed by an improved normalised gross margin of 10.8% vs -0.2% in FY20, DCG witnessed normalised EBITDA profit of $7.6 million during FY21 against EBITDA loss of $42.3 million in FY20.
• Improvement in Losses: DCG reported a statutory after-tax loss of $11.5 million against the loss of $140.4 million in FY20. This includes the write-down of a contract position of $9.7 million from a legacy dispute.

Revenue & NPAT (Source: Analysis by Kalkine Group)

Secured New Contacts: DCG won two new contracts of $88.7 million and $28.2 million with Major Road Projects Victoria for Barwon Heads Road Upgrade – Work Package 1 and Roy Hill-Munjina Road alignment works, respectively, in the month of September 2021.

• The company is likely to commence execution on the Work Package 1 contract on an immediate basis and anticipates finalising it in 2023.
• With respect to Roy Hill-Munjina Road alignment works, DCG is likely to begin work in October 2021 and expects to finish the work by mid of 2022.

Key Risk:

• Funding and Liquidity Risk: DCG’s business model requires decent funding in order to finish its contract in an effective manner. This may lead the business to a more debt position moving forward.
• Contract Pricing Risk: The company is exposed to a risk arising from the changes in the pricing of the ongoing contracts. As a result, its operation and financial performance could be hampered.

Outlook:

• At the end of FY21, the company had an order book of ~$570 million contracted and preferred, which include ~$400 million work in hand, contracted and preferred for FY22.
• For FY22, the company is expecting revenue of ~$500 million and anticipates maintaining a gross margin of 8-9%.

Stock Recommendation: The company closed FY21 with a cash balance of $9.7 million as compared to $43.9 million as on 30 June 2021. The stock of DCG is trading near to its 52-week low level of $0.310, offering a decent opportunity for accumulation. The stock has been corrected by ~31.06% and ~35.45% in the past six and nine months, respectively. On a TTM basis, DCG has an EV/Sales multiple of 0.3x as compared to the industry average (Construction & Engineering) of 9.0x. Thus, it can be said that the stock is undervalued at the current trading levels. Considering valuation on a TTM basis, improving earnings, decent liquidity position, decent outlook, current trading level and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.355 as on 22 November 2021.

DCG Daily Technical Chart, Data Source: REFINITIV 

BSA Limited

BSA Details

Trading Update for Q1FY22: BSA Limited (ASX: BSA) provides contracting services to subscription TV and telecommunication companies who require satellite and telecommunication installation services. In a recent trading update for the 3-month period ended 30 September 2021, the company’s results have been impacted by COVID-19 restrictions in NSW and VIC, and these states contributes to 75% of the company’s operations.

• The company’s financial performance was affected mainly due to restrictions and full suspension on construction sites, classification of essential services excluded key platforms such as smart metering and Foxtel and increased site protocols in both divisions (CUI and APS), reducing productivity and attendance.
• However, BSA anticipates returning to prior-year levels of revenue and earnings in 2HFY22 and expects revenue in the range of $200 - $210 million and underlying EBITDA loss in the ambit of ($2.0) – ($4.0) million.

FY21 Operational and Financial Highlights:

• Decline in Revenue: For the year ended 30 June 2021, the company recorded revenue amounting to $422.5 million as compared to $486.5 million in FY20, mainly due to nbn volumes stabilizing post FY20 activations peak and APS COVID-19 impact.
• Fall in EBITDA: Due to the impact on volumes, the company’s underlying EBITDA for the year went down to $23.1 million against $25.9 million in FY20.
• Returns to Shareholders: Despite the impact on its financial performance, the company paid a fully franked final dividend of 0.5 cents per share, which brought the total dividend to 1 cent per share.

Revenue & EBITDA Trend (Source: Analysis by Kalkine Group)

Key Risks:

• Liquidity and Funding Risk: The company’s operational and financial performance could be impacted by the disruptions in the available liquidity as its operations require an ample amount of capital.
• COVID-19 Uncertainties: BSA is exposed to a risk arising from the uncertainties in relation to the COVID-19 pandemic, which impacted its performance in FY21.

Outlook:

• For FY22, the company would focus on leveraging core platform technology and data in order to enhance productivity and efficiency in delivery.
• BSA would also work to retain leading performance on core contracts to secure additional discretionary volumes.
• The company is planning to focus on acquisitions in order to achieve a three-year $750 million revenue objective.

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: The company closed FY21 with a net cash position of $11.9 million as compared to $32.7 million as on 30 June 2020. The stock of BSA is trading at par to its 52-week low level of $0.250, offering a decent opportunity for accumulation. The stock has been corrected by ~14.99% and ~12.06% in the past one and three months, respectively. 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 can trade at a slight discount to its peers’ average EV/Sales multiple, considering the COVID-19 disruptions and declining earnings. For the purpose of valuation, peers such as Mader Group Ltd (ASX: MAD), Millennium Services Group Ltd (ASX: MIL), and 5G Networks Ltd (ASX: 5GN) have been considered. Considering the expected upside in valuation, deleveraged balance sheet, decent liquidity position, optimism for future growth, decent outlook, current trading levels, and key risks associated with the business, we recommend a ‘Speculative Buy’ rating on the stock at the closing price of $0.250, down by ~1.961% as on 22 November 2021.

BSA 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.

Disclaimer - This report has been issued by Kalkine Pty Limited (ABN 34 154 808 312) (Australian financial services licence number 425376) (“Kalkine”) and prepared by Kalkine and its related bodies corporate authorised to provide general financial product advice. Kalkine.com.au and associated pages are published by Kalkine.

Any advice provided in this report is general advice only and does not take into account your objectives, financial situation or needs. You should therefore consider whether the advice is appropriate to your objectives, financial situation and needs before acting upon it.

There may be a Product Disclosure Statement, Information Statement or other offer document for the securities or other financial products referred to in Kalkine reports. You should obtain a copy of the relevant Product Disclosure Statement, Information Statement or offer document and consider the statement or document before making any decision about whether to acquire the security or product.

You should also seek advice from a financial adviser, stockbroker or other professional (including taxation and legal advice) as necessary before acting on any advice in this report or on the Kalkine website. Not all investments are appropriate for all people.

The information in this report and on the Kalkine website has been prepared from a wide variety of sources, which Kalkine, to the best of its knowledge and belief, considers accurate. Kalkine has made every effort to ensure the reliability of information contained in its reports, newsletters and websites. All information represents our views at the date of publication and may change without notice.

Kalkine does not guarantee the performance of, or returns on, any investment. To the extent permitted by law, Kalkine excludes all liability for any loss or damage arising from the use of this report, the Kalkine website and any information published on the Kalkine website (including any indirect or consequential loss, any data loss or data corruption). If the law prohibits this exclusion, Kalkine hereby limits its liability, to the extent permitted by law, to the resupply of services.

Please also read our Terms & Conditions and Financial Services Guide for further information.

On the date of publishing this report (referred to on the Kalkine website), employees and/or associates of Kalkine and its related entities do not hold interests in any of the securities or other financial products covered on the Kalkine website.

Kalkine Media Pty Ltd, an affiliate of Kalkine Pty Ltd, may have received, or be entitled to receive, financial consideration in connection with providing information about certain entity(s) covered on its website.