Favourable Macro Statistics in Service Segment Favoring Professional and Business Support Services Sector

I. Sector Landscape

Australia’s resilience is underpinned by a diverse mix of competitive players in the professional and business support services sector. In FY21, Administrative and support services contributed 3.1% to the total gross value added of $1,854 billion. The Australian service sector enlarged by 3.3% per year in the past three decades to June 2021.

Macro Statistics Substantiating Favourable Prospects for the Sector

GVA Growth in Select Industries Showcasing Favourable Performance Metrics

Index Performance

Index Performance

The ASX 200 Commercial & Professional Services (Industry Group) have generated a 2-year return of ~+11.63%, compared to ~+9.64% return by the ASX 200 Index. Increased capital investment, strong GVA contribution from services, supportive government policies, and recovery in the labour force are favourable factors driving sector gains.

The ASX 200 Commercial & Professional Services (Industry Group) outperformed ASX 200 Index in the past two years by ~1.99%.

Source: REFINITIV as of 23 June 2022

Key Risks and Challenges

Outlook

II. Investment theme and stocks under discussion (ALQ, CWY, SSM)

After understanding the sector, let us now look at three companies listed on the ASX. The price potential of the companies under discussion has been analysed based on the ‘EV/Sales’ multiple method.

1. ASX: ALQ (ALS Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$5.32 billion)

ALQ is engaged in providing laboratory testing certification, inspection, and verification solutions. Operating segments are – Life sciences, commodities, and industrial.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 17.67% on 23 June 2022. Moreover, given a robust balance sheet and decent growth prospects, the stock might trade at a slight premium compared to its peers’ median EV/Sales (NTM trading multiple). Peers such as Countplus Ltd (ASX: CUP), IPH Ltd (ASX: IPH), and Kelly Partners Group Holdings Ltd (ASX: KPG) have been considered. Given the favourable fundamentals, high volume in the commodities segment, margin expansion, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $11.06, up by ~0.454% on 23 June 2022. In addition, the stock has delivered an annualised dividend yield of 2.97%.

ALQ Daily Technical Chart (Source: REFINITIV)

2. ASX: CWY (Clearway Waste Management Limited)

(Recommendation: Buy, Potential Upside: Low Double-Digit, Mcap: A$5.40 billion)

CWY is engaged in the collection services of solid waste streams and includes general waste, recyclable, construction & demolition waste, to name a few.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 16.91% on 23 June 2022. Moreover, the stock might trade at some premium compared to its peers’ average EV/Sales (NTM trading multiple), given economic recovery and increased customer contracts. Peers such as HRL Holdings Ltd (ASX: HRL), SG Fleet Group Ltd (ASX: SGF), Mader Group Ltd (ASX: MAD), and others are considered. Given the robust increase in top-line, elevated bottom-line, decent liquidity position, current trading levels, and upside indicated by valuation, we give a “Buy” recommendation on the stock at the closing market price of $2.560, down by ~2.290% on 23 June 2022. In addition, the stock has delivered an annualised dividend yield of 1.83%.

CWY Daily Technical Chart (Source: REFINITIV)

3. ASX: SSM (Service Stream Limited)

(Recommendation: Hold, Potential Upside: Low Double-Digit, Mcap: A$498.92 million)

SSM is engaged in essential network services, including access, build, design, maintenance, and installation. Operating segments include – telecommunications, utilities, and transportation.

Valuation

The illustrative valuation model suggests that the stock has a potential upside of 11.42% on 23 June 2022. However, the stock might trade at a slight discount compared to its peers’ average EV/Sales (NTM trading multiple), given the escalation in the government's response and program delays. Peers such as SRG Global Ltd (ASX: SRG), NRW Holdings Ltd (ASX: NWH), Saunders International Ltd (ASX: SND), and others are considered. Given the substantial cash conversion rate, decent financial leverage, favourable fundamentals, current trading levels, and upside indicated by valuation, we give a “Hold” recommendation on the stock at the closing market price of $0.815, up by ~0.617% on 23 June 2022. In addition, the stock has delivered an annualised dividend yield of 3.08%.

SSM Daily Technical Chart (Source: REFINITIV)

Comparative Price Chart: 

Source: REFINITIV 

Markets are trading in a highly volatile zone currently due to certain macro-economic and geopolitical tensions prevailing. Therefore, it is prudent to follow a cautious approach while investing. 

Note: All the recommendations and the calculations are based on the closing price of 23 June 2022. The financial information has been retrieved from the respective company’s website and REFINITIV.  

Investment decisions should be made depending on the investors' appetite for upside potential, risks, holding duration, and any previous holdings. Investors can consider exiting the stock if the Target Price mentioned as per the valuation has been achieved and is subject to the factors discussed above.

Disclaimer

Kalkine New Zealand Limited is authorised to provide general advice only. The information on this website does not take into account any of your investment objectives, financial situation or needs. Before you make a decision about whether to acquire a financial product, you should obtain the Product Disclosure Statement from the product issuer. You should consider the appropriateness of advice taking into account your own objectives, financial situation and needs and seek independent financial advice before making any financial decisions.