Spirit Technology Solutions Ltd

ST1 Details

Spirit Technology Solutions Ltd (ASX: ST1) operates as an IT and telecommunications service provider in Australia. It offers cloud services, managed IT services, and cyber security services to small and medium-sized businesses. On the telecommunications front, ST1 provides internet and network services which comprise fiber, fixed wireless, managed routers, and private networks.

Key Takeaways in H1FY22 Results: ST1 witnessed strong traction in organic sales with an uprise in total contract value and progressed with decent liquidity.

• H1FY22 revenues clocked 54% growth YoY to reach $66.2 million aided by organic sales with total contract value reaching $12.2 million in November 2021 and $13.6 million in December 2021.
• ST1 bagged substantial contracts from banking & financial services ($3.3 million) and network services ($2.6 million).
• Its recurring revenues grew 66% to $34.3 million (about 52% of total revenue).
• Its statutory EBITDA uplifted by 62% to $5.47 million aided by price rise partly offsetting cost inflation and supply chain-related woos led by the pandemic.
• The company is in divestment mode. It is in talks with a preferred buyer for the sale of its fixed tower assets. In October 2021, the company announced the sale of residential internet businesses for $5.1 million to focus on corporate digital workplace businesses.
• As of December 31, 2021, ST1 held a cash balance of $17.4 million and debt through its CBA facility.

Key Financial Highlights (Analysis by Kalkine Group)

Key Risks: The operations of ST1 were impacted by supply chain disruptions and cost inflation on the back of the pandemic. A challenging business environment with increasing competitive pressure may delay margin expansion. Macro policy tightening may affect business wins in the banking and financial services space. Chip shortages also influence the deliveries and service lead times.

Outlook: With an integrated IT and telecom business model, ST1 is well-positioned to cater to the spurt in pent-up demand with increasing digital investments. The company plans to ramp up its high-margin recurring revenues with larger revenue contracts that provide predictable cash flows.

Valuation Methodology: EV/EBITDA 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 ST1 has been corrected by ~31.25% in the past three months. The stock is currently trading lower than the average of its 52-weeks’ low-high range of $0.155-$0.415. The stock has been valued using the Enterprise Value to Sales 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, considering the impact of cost inflation and chip shortage on its operations. For this purpose of valuation, a few peers like Macquarie Telecom Group Ltd. (ASX: MAQ), Aussie Broadband Ltd. (ASX: ABB), Superloop Ltd. (ASX: SLC), and others have been considered. Considering the strong results in H1FY22 with organic sales and healthy EBITDA, well-integrated business model, disinvestment plans, recurring revenue focus, indicative upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.160 as of 22 February 2022, 12:41 PM (GMT+10), Sydney, Eastern Australia.

ST1 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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