Stocks’ Details

Service Stream Limited

Decent Rise in Revenue: Service Stream Limited (ASX: SSM) provides network services, which includes access, design, build, installation and maintenance. The market capitalisation of the company stood at $1.12 Bn as on 6^th February 2020. Recently, the company notified the market with the financial and operational performance for 1H FY20, wherein it reported adjusted NPAT (NPATA) amounting to $32.3 million, reflecting a rise of 28% on pcp. Also, the company experienced an increase of 43% million in revenue.

SSM generated operating cash flow before interest and tax of $32.8 million for the period, against $26.4 million in the prior corresponding period. During the same time period, Comdain Infrastructure, acquired by SSM in January 2019, secured two new long-term contracts with Sydney Water and Queensland Urban Utilities.The Board of the company declared an interim dividend amounting to 4.0 cents per share, which was primarily backed by a solid cashflow performance. The company would be paying this dividend on 19^th March 2020.


Group Revenue (Source: Company Reports)

Guidance: For 2H FY20, the company is anticipating EBITDA from operations to be in-line with numbers in 1H FY20. The company also expects to deliver another year of solid growth on the back of additional revenue contribution from Wireless, Comdain Infrastructure, nbn maintenance activities, etc.

Valuation Methodology:P/E Multiple Approach

P/E Based Valuation (Source: Thomson Reuters)
 
Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: During 1HFY20, the company experienced strong demand for nbn activation services. The company is focused on developing strategies to target new business opportunities via expanded geographies in 2HFY20. We have valued the stock using the P/E based relative valuation method and, for the said purpose, we have considered peers like Telstra Corporation Ltd (ASX: TLS), Vocus Group Limited (ASX: VOC) and TPG Telecom Ltd (ASX: TPM). Therefore, we have arrived at the target price, which is offering an upside of lower double-digit (in percentage terms). Hence, considering the decent set of financial numbers in 1H FY20, expectation of growth in FY20 and decent returns to shareholders, we give a “Buy” recommendation on the stock at the current market price of $2.500 per share, down 9.091% on 6^th February 2020, taking cues from the released 1HFY20 financial results.

CIMIC Group Limited

New Contracts Awarded to CPB Contractors: CIMIC Group Limited (ASX: CIM) is a provider of construction, mining and operation and maintenance services to the infrastructure sector. The market capitalisation of the company stood at $10.01 Bn as on 6^th February 2020. In a recent announcement, the company stated that CPB Contractors, a CIMIC Group company, has been selected for delivering upgrades to two major regional highway projects, namely, the South Gippsland Highway Upgrade and Mackay Northern Access Upgrade. These projects will provide a revenue of $164 million to CPB Contractors.

On the financial front, the company reported revenue amounting to $14.7 billion along with stable operating profit, PBT and NPAT margins of 8.4%, 7.5% and 5.4%, respectively, during FY19. FY19 also saw some key developments, including the selection of Pacific Partnerships, CPB Contractors and UGL throughout two packages of work for Cross River Rail in Brisbane.


Financial Performance (Source: Company Reports)

NPAT Guidance for FY20: The company is optimistic about its future on the back of strong work in hand of $37.5 billion and a pipeline of opportunities. For FY20, the company is expecting NPAT in the range of $810 Mn- $850 Mn. The company is focused on sustaining a strong balance sheet, generating cash, as well as adopting a rigorous approach to tendering and project delivery.

Valuation Methodology:P/E Based Valuation

P/E Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation:  Gross margin and EBITDA margin of the company stood at 44.1% and 14.4% as compared to the industry median of 12.9% and 6.2%, respectively. During FY19, the company has returned an amount of $526 million to shareholders in the form of dividends of $509 million and share buyback of $17 million. We have valued the stock using the P/E based relative valuation approach and arrived at the target price, which is offering an upside of lower double-digit (in percentage terms). Therefore, in the light of the decent growth in margins and a strong pipeline of work in hand, we give a “Buy” recommendation on the stock at the current market price of $30.000 per share, down by 3.007% on 6^th February 2020.
 

Downer EDI Limited

Awarded with a Five-Year Contract: Downer EDI Limited (ASX: DOW) is engaged in designing, building and sustaining assets, infrastructure and facilities. The market capitalisation of the company stood at A$4.34 Bn as on 6^th February 2020. The company recently noted from the release of Perenti Global Limited (ASX: PRN), that the latter has been considering the purchase of the mining services division of Downer EDI Limited. However, the process is currently ongoing. PRN will issue an offer only if the acquisition aligns with its strategy and deliver value for the shareholders.

In another update, DOW announced that it has been awarded a five-year contract to provide mining and related services at the Meandu Mine, which has a worth of around $600 million. This new contract would extend its current operations at the mine, which commenced in 2013 and expires on 30 June 2020. Moreover, the new contract will begin on 1 July 2020. The below picture depicts the key financial metrics for FY19:


FY19 Key Metrics (Source: Company Reports)

Guidance for FY20: For the financial year 2020, the company has revised its guidance for NPATA to $300. The company also anticipates a cash conversion of around 40-50% of EBITDA. The company is focused on developing solutions for decreasing its energy consumption and greenhouse gas (GHG) emissions.

Valuation Methodology:EV/EBITDA Multiple Approach

EV/EBITDA Based Valuation (Source: Thomson Reuters)

Note: All forecasted figures and peers have been taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Return on equity of the company stood at 8.8% in FY19, reflecting YoY growth of 6.5%. This reflects that the company has improved its position to provide returns to shareholders. We have valued the stock using EV/ EBITDA based relative valuation approach and for the purpose, have taken the peer group - Monadelphous Group Ltd (ASX: MND), Boral Ltd (ASX: BLD), and Fletcher Building Ltd (ASX: FBU). As a result, we have arrived at a target price which is offering an upside of lower double-digit (in percentage terms). Hence, considering the recently secured contract, which might help the company in gaining traction in the market, improvement in shareholders returns, and valuation, we give a “Buy” recommendation on the stock at the current market price of $7.340 per share, up 0.686% on 6^th February 2020.
 
 
Comparative Price Chart (Source: Thomson Reuters)