BSA Limited

Company Overview: BSA Limited (ASX: BSA) is engaged in providing contracting services to subscription TV and telecommunication companies. The Group operates under two reportable segments – Communications & Utility Infrastructure (CUI): It provides services to the telecommunications, subscription television and utility industries, which includes the delivery of bundled services over fixed-line multi-technology networks. It is also involved in the installation of subscription television and the installation of smart meters; Advanced Property Solutions (APS) – This segment facilitates the design, installation and maintenance of building services in commercial and industrial buildings, including fire detection and suppression, ventilation, air conditioning and electrical, to name a few.

BSA Details

Contract Wins & Project Execution to Aid Earnings: BSA Limited (ASX: BSA) provides contracting services to clients in the telecommunications and the building services space. The market capitalisation of the company, as on 26 February 2021, stood at ~$134.32 million. As per a recent update, the company has secured a multi-year Field Operations (Services) Agreement with Telstra, in partnership with Kordia Solutions. The contract will be for a period of three years with potential 1+1 extension at the discretion of Telstra. In accordance with the contract, BSA will provide Telstra with services which include design and construct building systems services across its Victoria and Tasmania properties, as well as important telecommunications work that involves asset relocation and wideband connectivity. BSA is expected to gain ~$25 million in revenue from the contract in the first year with the scope of further growth.

BSA is focused on improving the cost base in the long term and grow on margins. It will look to structure the business and make delivery changes that align the business to an increased variable cost model and reduce overall overhead spends.

H1FY21 Performance Update: During the period, the company reported revenues of $213.2 million, compared to $259.1 million in H1FY20, owing to reduced nbn volumes post the peak in FY20. However, the company had key tender success in Q2FY21, which enhances the revenue from FY22 onwards. The underlying EBITDA during H1FY21 was at $11.4 million, and the underlying NPAT stood at $3.3 million. It declared an interim dividend of 0.5 cents per share during the period under consideration. It ended the first half with an improvement in the cash position to $24.8 million and reported net cash of $21.5 million as on 31 December 2020.

H1FY21 Financial Performance (Source: Company Reports)

Improved EBITDA Margins Despite Decreased Revenue in CUI Segment in 1HFY21: The company reported a revenue of $105.3 million in H1FY21 from the Communications & Utility Infrastructure (CUI) segment. It was impacted by the reduced nbn activation volumes as the connection roll out phase reduces from the FY20 peak. The underlying EBITDA stood at $8.9 million. However, the company delivered a decent EBITDA margin performance of 8.5%, an improvement compared to 7.8% during the previous corresponding period. It was due to the continued efforts of the company to provide technology and delivery solutions to improve its efficiency and performance. The contract wins with nbn, foxtel and Telstra places it in a comfortable revenue base for FY22 onwards along with a significant increase in market share. There has been a growth of ~76% in smart metering sector, compared to the pcp. Moreover, the acquisition of Catalyst ONE in December, puts BSA into an advantageous position to look for growth opportunities in the wireless sector.

H1FY21 CUI Performance (Source: Company Reports)

Quick Look at APS Segment Performance in 1HFY21: The revenues from Advanced Property Solutions (APS) stood at $107.9 million during H1FY21, and it was in line with that of H1FY20. The company expects strong revenue streams in reactive and minor works as the economic environment improves with the stabilisation of the impact of COVID-19 pandemic. BSA has started its pilot IoT solution to support future data-driven asset maintenance programs.

H1FY21 APS Performance (Source: Company Reports)

Long Term Agreement with nbn: On 16 December 2020, the company has announced that it has secured a significant long-term agreement with nbn Co for Unified Field Operations (Services) for a period of four years. The agreement has the potential of two x two-year extension options at nbn’s discretion. The contract is expected to increase BSA’s base market share and generate approximately $85 million of revenue in the first year. It is scheduled to begin from around 1 March 2021.

Top 10 Shareholders: The top 10 shareholders together form around 80.95% of the total shareholding, while the top 4 constitute the maximum holding. Naos Asset Management Ltd and Lanyon Asset Management Pty Limited are holding a maximum stake in the company at 29.21% and 22.16%, respectively, as also highlighted in the chart below:

Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group

Key Metrics: The company reported gross margins of 21.7% during H1FY21 and net margin of 0.6%. ROE stood at 4% during the same period. There was an improvement in the cash cycle to negative 13.3 days in H1FY21, compared to 2.7 days in the previous corresponding period. BSA also reported an improvement in the debt-to-equity ratio to 0.39x during the period from 0.53x in H1FY20.

Growth and Liquidity Profile (Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Key Risks: The Group offers its services to various clients and has receivables on its balance sheet. As such, it is exposed to credit risk. The company has to monitor the collection of receivables and amounts due from customers under construction contracts, on an ongoing basis. The company operates in a sector where personnel are prone to injury risk and health hazards owing to the scale of risk in operations involved in the business. However, BSA has been reporting a downward trend in the long-term performance of lost time injury frequency rate, with a focus on improving Total Recordable Injury Frequency Rate through awareness programs. The onset of the COVID-19 pandemic has impacted the company's business as clients have deferred project activities due to the uncertain economic environment.

Outlook:  As per the company, its core markets remain robust with an impressive pipeline of projects across the majority of the sectors. It expects spending to rebound strongly in sectors that have been impacted by the COVID-19 pandemic, due to an improvement in the customer sentiment. BSA has positioned itself well for future revenue growth, with contract wins and acquisitions that are set to augment the earnings from FY22 and onwards. It has provided FY21 revenue guidance of $400 million - $420 million. It has also set itself a three-year target of revenue growth to $750 million in FY24, with EBITDA margins of 5% and a dividend payout ratio of 60%.

Valuation Methodology: P/E 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 company delivered decent cash flow performance during H1FY21 with an ~82% operating cash flow conversion, reflecting the solid underlying business. As per ASX, the stock of BSA is trading below its average 52-weeks’ levels of $0.230-$.400. The stock of BSA gave a positive return of ~5.26% in the past three months and a positive return of ~1.69% in the past six months. On a technical analysis front, the stock of BSA has a support level of ~$0.285 and a resistance level of ~$0.319. We have valued the stock using a P/E multiple-based illustrative relative valuation and have arrived at a target price of low double-digit upside (in % terms). For the purpose, we have taken peers such as Southern Cross Electrical Engineering Limited (ASX: SXE), Service Stream Limited (ASX: SSM), Monadelphous Group Limited (ASX: MND), to name a few. We believe that the company might trade at a slight premium to its peer average P/E (NTM Trading multiple), considering the contract wins under its disposal, optimistic outlook and stable balance sheet. Considering the current trading levels, expected upside in valuation, building revenue base for the future, comfortable balance sheet with net cash position and key risks associated with the business, we recommend a 'Speculative Buy' rating on the stock at the current market price of $0.300, down by 3.226% as on 26 February 2021.

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

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