Service Stream Limited

SSM Details

Substantial Shareholding: Service Stream Limited (ASX: SSM) provides design, construction, operation, and maintenance services to utilities and telecommunication companies in Australia. On 17 September 2021, Allan Gray Australia Pty Limited (Allan Gray Australia) and its related entities held ~31.35 million voting shares in SSM.

FY21 Results:

• Revenue Impact: The Group revenue declined by 13.4% YoY to $804.2 million, with the Telecommunications witnessing a net decline of 27.9% YoY and the Utilities registering a growth of only 7.1% YoY in FY21.
• Multi-Year Agreements Signed: SSM entered long-term contracts namely, Unified Field Operations (Unify Services) and Unified Field Operations (Unify Networks) with nbn, and Field Optimisation Agreement (TFO) with Telstra during the year.
• Comdain’s Performance: Within Utilities segment, Comdain Infrastructure delivered unit operations 11% YoY revenue growth in FY21.
• Increase in Total Debt Facilities: The net financing costs rose to $4.0 million, up by $0.6 million due to the refinancing of banking facilities in FY21. The total debt facilities increased to $275 million in Q2FY21 to drive future growth opportunities.
• Improved Conversion: The EBITDA to operating cash flow from operations before interest and tax (OCFBIT) conversion improved to 99% in FY21 from 81.9% in FY20.

Group EBITDA from Operations Trend from FY17-FY21; (Analysis by Kalkine Group)

Key Risks: SSM faces the risk of variable customer demand, renewal of contracts, vital personnel retention, subcontractors' sourcing, customer concentration risk, and technological disruptions such as 5G.

Outlook:

• The company expects the demand for essential network services to remain robust in the medium term.
• SSM witnessed positive momentum in the Utilities segment in FY21 and, as a result, expects to seek higher prospects in the segment.
• With the refreshed network infrastructure, functional uplifts for the Comdain business, improved field service solutions for the Unify contracts in FY21; the Group is well poised to deliver on its strategic goals as per the Board’s expectations.
• With the ongoing acquisition deal with the Lendlease Group, SSM estimates to diversify revenue base, expand the present capabilities and addressable markets, and close the deal around November 2021.
• The company will hold a virtual Annual General Meeting on 20 October 2021.

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 SSM gave a positive return of ~3.52% in the past month and a negative return of ~1.76% in the past three months. The stock is currently trading lower than the 52-weeks’ average price level band of $0.735 - $2.431The stock has been valued using an 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’ average EV/Sales multiple, considering its lower top-line and bottom-line in FY21, COVID-19 and integration risks, and expected increase in debt due to the Lendlease acquisition. For the purpose of valuation, few peers like CIMIC Group Limited (ASX: CIM), Monadelphous Group Limited (ASX: MND), Lycopodium Limited (ASX: LYL), and others have been considered. Considering the current trading levels, new Telecom contracts signed in FY21, endeavour to expand revenue base through refreshed strategy and acquisitions, estimated growth of Utilities (Comdain) segment in FY22, valuation upside, and key associated business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.880, as on 5 October 2021, 11:42 AM, (GMT+10), Sydney, Eastern Australia.

Investors with a high-risk appetite should evaluate this stock given the technical support and resistance levels and considering the associated risks of COVID-19, project delays, technological changes, and revenue concentration.

SSM Daily Technical Chart, Data Source: REFINITIV 

BSA Limited

BSA Details

Issue of Shares: BSA Limited (ASX: BSA) provides contracting services to subscription TV and telecommunication companies. On 29 September 2021, BSA issued 143,369 fully paid ordinary shares at $0.29 per share on the conversion of performance rights as per an employee incentive scheme.

Change in Shareholding: Wentworth Williamson Management Pty Limited (WWM) is no longer a substantial holder in BSA from 20 September 2021 via sales of 1.5 million shares in an on-market transaction.

Share Buy-Back: On 24 August 2021, BSA announced an on-market buy-back of 434.36 million shares via Cannacord Genuity (Australia) Limited (the broker). The buy-back period opened on 9 September 2021 and will close on 9 September 2022, though BSA has the right to terminate the buy-back at any time before the closing date.

FY21 Financial Takeaways:

• Revenue Dip: The revenue declined from $486.53 million in FY20 to $422.54 million in FY21 though the recurring revenue increased (FY21: 84% vs FY20: 81%).
• Decline in NPAT: The net profit from continuing operations declined to $1.47 million in FY21 versus $7.80 million in FY20.
• Dividend Declaration: The company has declared a final dividend of 0.50 cents per share, franked at 30% tax with 5 October 2021 as the Record Date and 3 November 2021 as the Payment Date. DRP will operate the final dividend, and 15 October 2021 has been set as the last date for receiving the election notice for applying to DRP.
• Contract Stream: BSA has renewed contracts for its Advanced Property Solutions (APS), obtained new contracts with Telstra and Vocus, and extended contracts with nbn and Foxtel in FY21.
• Focus on Operational Resilience: BSA secured multiple new contracts in 1HFY21 and 2HFY21 focused on implementing these contracts. BSA developed its internal delivery model and structures to maximise client services, scalability, and internal efficiency for growth.
• Improved EBITDA Margins: The margins at the Underlying EBITDA line enhanced to 5.5% from 5.28%, and the cash conversion was maintained at 77% in FY21.
• Liquidity & Debt Position: BSA held $12.82 million cash and cash equivalents and total debt of $21 million as of 30 June 2021.

The trend of Group Revenue & Underlying EBITDA from FY18-FY21; (Analysis by Kalkine Group) 

Key Risks: The company faces the risk of technological changes, COVID-19 impact, credit risk on receivables.

Outlook:

• BSA targets $750 million revenue and above 5% EBITDA margins by FY2024.
• BSA is working on identifying a new complementary revenue stream and has identified target sectors to increase profitability via scale and diversification.
• For FY22, BSA plans to increase business development and sales resources investment, standardise service delivery processes for its increased capacity, and expand Defence and Data Centre customer base.

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 BSA gave a positive return of 11.67% in the past three months and a positive return of 8.62% in the past six months. The stock is currently trading lower than the 52-weeks’ average price level of $0.255 - $0.380. The stock has been valued using an PE multiple based illustrative relative valuation method and arrived at a target price of low double-digit upside (in % terms). The company might trade at some discount than its peers’ average PE multiple, considering its impacted financial performance, negative cashflows in FY21, and the impact of limited capacity considerations, and project delays in the construction sector. For the purpose of valuation, few peers like Telstra Corporation Limited (ASX: TLS), Mader Group Limited (ASX: MAD), SKY Network Television Limited (ASX: SKTYY) have been considered. Considering the current trading levels, new contracts signed in FY21, improved operational and financial metrics, expansion to the wireless sector via the acquisition of Catalyst ONE in FY21, EBITA margin targeted in the next three years and plans to diversify revenue stream, and valuation, and associated business risks, we give a ‘Speculative Buy’ rating on the stock at the current market price of $0.265, as on 5 October 2021, 11:49 AM, (GMT+10), Sydney, Eastern Australia.

BSA 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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