BSA Limited

Company Overview: BSA Limited (ASX: BSA) is a national provider of contracting services to subscription TV and telecommunication companies. The Group is organized into two segments, namely BSA | Communications & Utility Infrastructure (CUI) and BSA | Advanced Property Solutions (APS). BSA | CUI provides services to the telecommunications, subscription television and utility industries, including the delivery of bundled services over fixed-line multi-technology networks, the installation of subscription television, and the installation of smart meters. BSA | APS provides the design, installation, maintenance, and optimization of building services for all hard assets in commercial and industrial buildings and properties.

BSA Details

Expanding Opportunities and Stable Returns to Shareholders: BSA Limited (ASX: BSA) is a national provider of contracting services to subscription TV and Telecommunication companies. As on 23 October 2020, the market capitalization of the company stood at ~$121.24 million. Despite the challenging circumstances associated with COVID-19, the company achieved its internal forecasts and witnessed significant volumes of work. It remains focused on expanding its current opportunities and is targeting complementary markets via strategic acquisitions. BSA retains a key competitive advantage with a decent presence in its geographical footprint, allowing the company to expand its overall capability. Amidst the uncertain market conditions due to the COVID-19 pandemic, BSA has shown strength and persistence in its core business and generated decent profits and returns to shareholders.

During FY20, the company reported an underlying revenue of $490.4 million, reflecting an increase of 4.4% on the prior corresponding period. The company also reported a substantial increase of 80% in its recurring revenue with the divestment of HVAC Build Major Projects division. In the same time span, BSA witnessed a growth of 5.4% in underlying EBITDA to $25.9 million but reported a decline of 22.7% in underlying net profit to $9.9 million from $12.8 million in FY19. The decline in NPAT was mainly due to the investments in technology for future growth and delay in discretionary work in some sectors because of the COVID-19 crisis. Over the span of 4 years from FY16 to FY20, the company witnessed a CAGR of 9.14% in gross profit, reflecting prudent management and the evolution of the company and the decent platform creation for growth.

FY20 Financial Highlights (Source: Company Reports)

During FY20, the company reported an operating cash inflow before interest and tax of $18.3 million, as compared to $19.1 million in the pcp. In the same time span, BSA reported a healthy balance sheet with an increase of $16.4 million in cash balance to $32.7 million. This was mainly due to the deferral measures by the Government agencies to help the companies pass through the uncertainty. The decent financial and operational performance enabled the Board to declare a fully franked final dividend of 0.5 cents per share, taking the full-year dividend to 1 cps.

Increase in Net Cash (Source: Company Reports)

Extension of nbn OMMA Contract: The company has recently extended its Operate and Maintain Master Agreement contract with NBN Co for the span of 6 months to 30 June 2021. It further retains an option to extend the contract for six months to December 2021. Under the contract, the company will provide a range of activation and assurance services to nbn.

BSA Acquires Catalyst ONE: The company has agreed to acquire 100% of the share capital of Catalyst ONE Pty Limited for an upfront payment of $2 million. The consideration can be increased to $5.5 million if the agreed EBITDA targets are achieved over a two year period. The acquisition is likely to be completed by 31 October 2020 and is anticipated to be EPS accretive in the 12 months. The acquisition will provide BSA with an entry point into the Wireless Telecommunications market, which strongly complements its existing strengths across Fixed Line Telecommunications Services.

Details of Top 10 Shareholders: The following table provides an overview of the top 10 shareholders of BSA Limited. Naos Asset Management Ltd is the largest shareholder in the company, with the percentage holding of 26.83%.  

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Margins: During FY20, gross margin of the company witnessed a slight improvement over the previous year and stood at 24.3%, up from 23.9% in FY19. During the year, EBITDA margin of the company was 4.4% and net margin stood at 1.6%. During FY20, Return on Equity of the company stood at 22.9%, higher than the industry median of 18.8%. This shows that the company is well-managing the capital of its shareholders and can generate profits internally. Looking into the balance sheet, current ratio of the company stood at 1.02x as compared to the industry median of 1.25x. During FY20, Assets/Equity Ratio of the company was 4.57x, and Debt/Equity ratio stood at 0.51x.

Key Margins (Source: Refinitiv, Thomson Reuters)

Key Investment Risks: Construction contracts of the company are accounted based on the estimate with estimated costs and date for the completion. Variations in contract work and claims are probable and may pose some risks. The group is also exposed to various risks including credit risk, market risk, interest rate risk, etc. However, the group has entered a variety of derivative financial instruments to manage its exposure to interest rate risk, including interest rate swaps. Given the uncertainty from the onset of COVID-19, the company might face lesser demand for its services which may impact the revenues.

Future Expectations and Growth Opportunities: The company seems well-positioned to benefit from the higher demand with the economy returning to normal levels. It will focus on current operational performance and is likely to expand in the wireless market. Given decent trading, improved certainty, and the company’s proactive focus on managing its working capital, it is likely to maximize the growth in shareholders' value. BSA is likely to see an increasing demand for its core services but may witness some uncertainty in the discretionary client spend. It retains decent business fundamentals with decent liquidity and healthy balance sheet position, which may help the company to navigate through the uncertain environment. The company is targeting profitability growth in FY21 and may pursue complementary and planned opportunities.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: Price to Earnings Multiple Based Relative Valuation Approach (Illustrative)

Price to Earnings Multiple Based Relative Valuation Approach (Source: Refinitiv, Thomson Reuters)

Note: All the forecasted figures are taken from Thomson Reuters, NTM: Next Twelve Months

Stock Recommendation: Notwithstanding the current economic uncertainty, decent financial results and increasing footprint of the company across the nation is likely to drive growth opportunities. The company has a modest platform for growth and is converting opportunities within adjacent sectors. As per ASX, the stock of BSA gave a negative return of 16.41% in the past three months and is trading at attractive levels, close to its 52-weeks’ low level of $0.230. On a technical front, the stock of BSA has a support level of $0.265 and a resistance level of $0.311. We have valued the stock using the P/E multiple based illustrative relative valuation and have arrived at a target upside of lower double-digit (in percentage terms). Considering the attractive trading levels, decent returns in the past three months, modest long term outlook and resilient performance despite the market uncertainty, we recommend a ‘Speculative Buy’ rating on the stock at the current market price of $0.280 on 23 October 2020.

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

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