SSM Details

 Highlights of the Completed Institutional Offer: Service Stream Limited (ASX: SSM) is an essential network services firm, primarily engaged in offering integrated end-to-end asset life cycle services across essential infrastructure networks within the Utilities and Telecommunication sectors. As of 23 July 2021, the market capitalisation of SSM stood at ~$385.76 million.

• On 22 July 2021, SSM confirmed the receipt of commitments for its Entitlement offer and Placement (collectively, the Institutional Offer) to raise ~$130 million in funds from the current and new institutional and sophisticated investors in Australia and overseas.
• SSM will now issue ~144 million shares to the successful applicants under the Institutional Offer at $0.90 per new share. The company is expected to settle ~$130 million funds on 30 July 2021.
• SSM plans to use the funds raised for partly financing the purchase of Lendlease Services Pty Limited for $310 million.

Further Capital Raise:

• SSM is undertaking another capital raise of $185 million via an Entitlement Offer (consisting of an institutional and a retail component) and share placement. SSM plans to seek $123 million from the Entitlement offer and $62 million from the Institutional share placement.
• Under the retail entitlement offer, SSM plans to raise ~$55 million. The offer will open on 27 July 2021 and is expected to close on 9 August 2021.

Purchase of Lendlease’ Services Business:

• On 21 July 2021, SSM signed an agreement with Lendlease Group to acquire its Services business for $310 million. The deal will be finalised by the close of CY21.
• SSM believes the acquisition will lead to the expansion of its service offerings and scale of operations.
• Lendlease Services is expected to generate $793 million in revenue and $45 million in EBITDA exclusive synergies in FY21.
  

Business Update:  

• In a release dated 15 June 2021, SSM has updated on the strong business fundamentals and priorities of the Group as one of the leading essential service providers. SSM has provided an update on the restricting done, growing pipeline, and revenue contribution expected from its Utilities and Telecommunications divisions in 2021.
  

Utilities Division

• Comdain is expected to generate ~10% revenue growth within the division due to new contracts. The guidance has been lowered from 15% stated previously, owing to the recent floods causing project delays.

• Comdain has a robust pipeline of secured work for FY22 and currently bidding for new contracts in major jurisdictions.
  

Telecommunications Division:

• SSM has re-secured all major telecommunications multi-year contracts for FY21.
• The Group integrated its Fixed Communications and Network Construction divisions into a single business unit to lower the operating cost base.
• SSM is advancing on multiple business development opportunities in the telecom sector for its fixed-line and wireless telecommunications infrastructure.

Revenue & NPAT Trend for FY16-FY20; (Analysis by Kalkine Group) 

Key Risks:

• The company faces the risk of realising synergies and successful integration from the ongoing acquisitions.
• SSM faces the impact of COVID-19 via a reduction in the volume of energy connections, shortage in the supply of materials and others.

Outlook:

• The management confirmed that the EBITDA in 2HFY21 would be in-line with the 1HFY21 And, the full year result is likely to be released on 26 August 2021
• The combined entity with the Lendlease Services is expected to generate ~$1.6 billion of revenue (Pro-forma) and ~$142 million of EBITDA (Pro-forma) inclusive of the complete pro forma run-rate of synergies for FY21.
• SSM expects ~$17 million cost synergies per year from the acquisition deal. The company will identify and assess additional synergies while integrating the businesses.
• The Board has determined not to declare a final dividend for FY21 to aid the financing of the acquisition.

Stock Details: The stock of SSM gave a positive return of 11.68% in the past month and a negative return of 46.65% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.817 - $2.431. However, on a long term basis LLC’s services business is expected to fetch synergies in the form of increased revenue, and EBITDA and reduced overall costs. As per the investor presentation release dated 21 July 2021, the ongoing acquisition transaction is expected to increase the company’s debt burden as SSM intends to draw down $122.9 million of debt facilities and existing cash. SSM has increased its current debt facilities to $395 million, up by $120 million to finance the acquisition partially and offer client bonding needs. Given the ongoing Landlease Services acquisition, further capital raise of $185 million, and the expected settlement of ~$130 million funds on 30 July 2021, we suggest investors wait and keep an eye on the further financial developments. The stock has closed at the current market price of $0.940 as of 23 July 2021.

SSM 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: -

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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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