Service Stream Limited

SSM Details

1H21 Results Released: Service Stream Limited (ASX: SSM) provides essential network services to the utilities and telecommunications companies. As on 25^th February 2021, the market capitalisation of the company stood at ~$698.64 million. The company has provided an update on its 1HFY21 results for the period ended 31 December 2020. The Group reported revenue of $409.9 million for 1H21, down by 17.7% on YoY basis. The reduced revenue was due to lower activation volumes from telecommunications segment and lower metering revenue because of the pandemic situation. Its Group EBITDA from operations stood at $39.1 million, down by 30.7% YoY on 1H20. During 1H21, Group NPAT stood at $16.2 million, $11.1 million lower than 1H20. SSM held $50.5 million cash as on 31 December 2020. Its net cash flows from operating activities amounted higher during 1H21 to $20.27 million. During 1H21, though the earnings of the Group were affected but it has gained significant long-term contracts with Telstra, multi-year contracts with NBN and declared an interim dividend of 2.50 cents per share, fully franked to be paid on 14 April 2021.

Income Statement, 1H21 Highlights (Source: Company Reports)

Outlook: For 2H21, the company plans to advance the mobilisation of work programs already secured during 1H21. It plans to secure more work programs related with the recent $4.5 billion Telco network upgrade program for growing the network in FY22 and FY23. It aims to keep a flexible resourcing model for availing growth opportunities and manage a proportionate Group cost base.

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

Data Source: Refinitiv, Thomson Reuters, 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 SSM gave a negative return of 25.8% in the past one month and a negative return of 27.76% in the past six months. The stock is currently trading at par with its 52-weeks’ low level of 1.34. The stock of SSM has a support level of ~$1.25 and a resistance level of ~$1.466. We have valued the stock using an Enterprise Value to EBITDA multiple based illustrative relative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe that the company can trade at some discount as compared to its peer median, considering its fall in top line in 1HFY21, reduced EBITDA and lower NPAT for 1H21 vs 1H20, delays in client procurement programs, COVID-19 imposed inter-state restrictions on movement and continued moratoriums on gas and electricity disconnections. For the purpose, we have taken peers like Monadelphous Group Limited (ASX: MND), SRG Global Limited (ASX: SRG), Johns Lyng Group Limited (ASX: JLG), to name a few. Considering the current trading levels, enhancement of shareholder’s value, growth in operating cash flows in 1H21, new contracts signed during 1H21, modest outlook in the long run, and valuation, we give a ‘Buy’ rating on the stock at the current market price of $1.340, down by 21.408% on 25^th February 2021. The fall in share price can be attributed to tepid 1HFY21 results and client-led delays to work program due to COVID-19 outbreak.

SSM Daily Technical Chart (Source: Refinitiv, Thomson Reuters)

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