Service Stream Limited

SSM Details

Lendlease Services Business Acquired: Service Stream Limited (ASX: SSM) provides essential network services to utilities and telecommunications companies. On 1 November 2021, SSM acquired Lendlease Services Pty Limited for ~$310 million enterprise value and expanded reach across utilities, and telecom sectors with the addition of an established transportation division. SSM met all precedent conditions for the business acquisition, raised ~$185 million equity, and used debt & available cash to fund the deal.

Address to Shareholders:

• Focus on Operational Delivery & Client Support: During FY21, SSM renewed its multi-year telecom contracts with key clients to underpin a robust core earnings base for the future.
• Robust Demand: The company reported strong demand for its services during FY21 and holds over ~$2 billion of a healthy contracted work pipeline across its blue-chip clientele.
• Met FY21 Guidance: The EBITDA from Operations stood at ~$80.1 million, consistent with estimated guidance despite COVID-19 challenges and a decline in NBN Co activations in telecommunications works.
• Net Cash Position Maintained: SSM reported a net cash position of ~$19.5 million due to cash flow generation and better EBITDA conversion (~99%) in FY21.

Net Income Trend from FY17-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of business integration from acquisitions, revenue diversification across sectors, renewal of contracts from its blue-chip client base, and COVID-19 volatility.

Outlook:

• The company reports strong industry sector fundamentals, further boosted by considerable private and public investment which will drive demand for increased infrastructure services in long term.
• With the recent acquisition of Lendlease Services, SSM expects Pro-Forma revenue of ~$1.7 billion and Pro-Forma EBITDA of ~$120-125 million for FY22, including ~$17 million Pro-forma run rate of synergies. FY22 performance will aid earnings from 1 November 2021 to 30 June 2022 post-acquisition completion.
• SSM estimates Pro-Forma EPS-A accretion of ~30% in FY22, prior to the one-time transaction and implementation costs.

Valuation Methodology: P/E 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 SSM gave a negative return of ~4.99% in the past three months and a negative return of ~11.37% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.735 - $2.431. The stock has been valued using the P/E 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’ average P/E multiple, considering reduced telecom revenues in FY21, debt drawn for the Lendlease Services business acquisition, COVID-19 risk, and business integration costs. For this purpose of valuation, few peers like CIMIC Group Limited (ASX: CIM), Monadelphous Group Limited (ASX: MND), MAAS Group Holdings Limited (ASX: MGH), and others have been considered. Considering the current trading levels, expected growth in Comdain division in FY22, cost synergies expected, expansion of blue-chip clients, deeper capabilities in utilities, industrial, and transportation sectors, FY22 EPS accretive earnings, valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing price of $0.855, down by ~1.725%, as of 8 November 2021.

SSM Daily Technical Chart, Data Source: REFINITIV  

AMA Group Limited

AMA Details

Q1FY22 Highlights: AMA Group Limited (ASX: AMA) is a supplier of vehicle parts, accessories, and provider of vehicle accident repairs in Australia & New Zealand. AMA operates Vehicle Panel Repairs, and Automotive Parts & Accessories segments. On 29 October 2021, AMA declared that Director, Paul Ruiz, held 410,455 ordinary shares in the company, post the acquisition of 41,666 shares at a consideration of $0.476177 per share.

• The company recently raised ~$99 million via an institutional and retail Entitlement offer at ~$0.375 per share. It settled ~$50 million convertible notes via listing the offer on the Singapore Exchange Securities Trading (SGX-ST).
• AMA repaid ~72.5 million bank debt from the proceeds of the convertible notes and Entitlement offers during Q1FY22.
• The company reported reduced repair volumes in New South Wales and Victoria due to COVID-19 lockdowns. AMA reported ~41% and ~20% weekly national average of unutilised booking capacity for Drive and Non-Drive car repairs during mid-October 2021, respectively.
• AMA collected ~$12.79 million cash receipts during the quarter.
• AMA held ~$71 million liquidity consisting of ~$62.97 million cash balance and ~$8 million unutilised finance facilities as of 30 September 2021. This available liquidity excludes ~$46 million received from the retail offer post-Q1FY22-End.

Total Revenue & Net Income Trend from FY17-FY21; (Analysis by Kalkine Group)

Key Risks: The company faces the risk of COVID-19 lockdowns, lower repair volumes, funding risk for working capital needs, and business growth. It risks the accrual of synergies from recent and planned acquisitions.

Outlook:

• AMA will conduct an online AGM (Annual General Meeting) on 18 November 2021.
• AMA will continue to focus on operational excellence and drive accretive growth organically and via acquisitions in the long run.
• The company believes it is well-positioned for the future and expects ease of COVID-19 restrictions in NSW (New South Wales) and Victoria in Q2FY22. As per the Apple mobility trends data for Sydney, private vehicular mobility increased as the recent lockdown restrictions began to ease, in line with last years’ experience of ease of lockdowns. Consequently, AMA expects increased mobility to drive the growth of repair volumes in the short term.

Valuation Methodology: EV/Sales 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 AMA gave a positive return of ~5.09% in the past three months and a negative return of ~2.19% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.383 - $0.870. 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’ median EV/Sales multiple considering the higher net loss in FY21, ongoing lockdown restrictions due to COVID-19, reported decline in Q1Y22 in the weekly national averages of Drive & Non-Drive car repairs. For this purpose of valuation, few peers like BSA Limited (ASX: BSA), SG Fleet Group Limited (ASX: SGF), Downer EDI Limited (ASX: DOW), and others have been considered. Considering the current trading levels, well-capitalisation, debt repayment, expected ease in lockdowns, increase in mobility & repair volumes in Q1FY22, upside in valuation, and associated key business risks, we give a ‘Speculative Buy’ rating on the stock at the closing price of $0.480, up by ~1.052%, as of 8 November 2021.

AMA 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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