Spirit Technology Solutions Limited

ST1 Details

FY21 Performance Highlights: Spirit Technology Solutions Limited (ASX: ST1) offers telecom and IT services that include enterprise-grade managed Wi-Fi, cybersecurity, networking, online backup, disaster recovery, and Smart ISDN solution for cloud transition in Australia.

• Record Top-line Growth: Sales revenue for FY21 recorded a 199% YoY incline amidst 256% increase in managed services and 255% increase in voice services. Considering exponential increase in adoption of IT and cloud solutions, ST1 introduced security services and cloud services into revenue streams diversified major product lines and contributed top-line growth.
• Transition to a Pure B2B Player: ST1 seeks growth opportunity in turning around revenue mix towards mid-corporates to establish sustainable and defensive revenue sources. ST1’s contract size has expanded into SMB (businesses with 5-50 employees) and Enterprise (1000+ employees and MNCs) territories as a result of larger & longer contracts and introduction of new services.
• Profitability: ST1 has turned profitable and booked $4.53 million in NPBT as a result of product line expansion and improved recurring revenue base. Sales total contract value for Q4FY21 clocked record high of $31.98 million, illustrating demand for spirit products and organic growth.
• Financial Position: With contract values reaching record highs at $31.8 million, balance sheet has improved with cash and available debt of $24.2 million as at 30 June 2021, while net debt amounts to only $1.5 million.

Source: Company Report, Analysis by Kalkine Group

Key Risks and Challenges

• Extreme Competition: With progressively diluting barriers to entry in IT industry, the competition has significantly increased across services and respective prices.
• Potential Supply Side Challenges: ST1 can struggle with the IT hardware supply chain, especially the telecom product line, as skilled labor market gets disrupted.

Outlook

Potential for IT services remains high as work from home culture has become standardized, hence cybersecurity and cloud services demand have translated to high run-rates. ST1 guidance outcomes for FY22 stands at $150-155 million in revenue & other income (up by 44-48% YoY) and $19.4-20.2 million in underlying EBITDA (up by 68-75% YoY).

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

Stock Recommendation

The stock of ST1 gave negative return of ~26.027% in the past one year. The stock is currently trading lower than the 52-weeks’ average price level band of $0.250 - $0.450. The stock has been valued using the EV/Sales multiple-based illustrative relative valuation method and arrived at a target price low double-digit (in percentage terms). The company might trade at some premium to its peers’ median, considering product line expansion, encroachment into MNCs and SMB customer segments, and near support trading levels. For the purpose of valuation, few peers like 5G Networks Ltd (ASX: 5GN), Aussie Broadband Ltd (ASX: ABB), MNF Group Ltd (ASX: MNF) have been considered. Considering diversified top-line segments, improved liquidity position, growth potential in IT services, and valuation, we give a “Speculative Buy” recommendation on the stock at the market price of $0.260, as of 27 August 2021, 10:59 AM (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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