Service Stream Limited

Company Overview: Service Stream Limited (ASX: SSM) is an essential network service provider in Australia. The company specialises in the designing, construction, operation and maintenance of assets across the telecommunication and utility industries. For telecommunication industries, SSM provides a variety of services ranging from constructing state-of-the-art broadband networks to maintaining and upgrading existing infrastructure. The company’s utility network teams provide engineering, asset and customer management services to Australia’s leading utilities and energy providers.

SSM Details

Decent Financial Performance in FY20 Backed by Continuing Demand for Essential Services: Service Stream Limited (ASX: SSM) is an essential network services company that provides integrated end-to-end asset life-cycle services to utility and telecommunications asset owners, operators and regulators across Australia. As SSM is an essential service provider, the demand for its services has remained strong throughout the COVID-19 crisis. As a result, the company was able to report decent financial performance during FY20, with ~9.0% YoY growth in revenue and 15.9% YoY growth in EBITDA from operations. Over the last five years, the company has delivered decent financial performance and has maintained a decent track record of rewarding its shareholders through dividend payments. From 2016 to 2020, the company’s revenue and NPAT have grown at a CAGR 20.62% and 25.30%, respectively.  Over this period, the company’s dividend has grown at a CAGR of 37.74%.

The management remains focused on identifying and securing growth opportunities across its core markets, whilst continuing to deliver strong, sustainable results for its shareholders. The company continues to hold a decent contracted pipeline of ongoing work across a blue-chip client base. SSM intends to grow and diversify its addressable market and recurring revenue base. In FY21, SSM expects continued demand for its services across critical infrastructure networks throughout the Utilities and Telecommunications industries.

Five-Year Financial Summary (Source: Company Report, Thomson Reuters)

FY20 Result Highlights: For the year ended 30 June 2020, the company reported total revenue of $929.1 million, up 9% on the previous year with Telecommunications segment reporting a net decrease of 7.7% and Utilities revenue increasing by 45.3% over the year. Further, the company reported record EBITDA from operations of $108.1 million, up by 15.9%. In FY20, the company successfully secured over $200 million in future annual revenues through contract extensions and new agreements across its utility operations. It also successfully expanded Comdain’s operations across western states, with initial works secured in Western Australia to commence in 1H21. In its Telecommunication segment, SSM secured multi-year (4+2+2) Unified Field Operations (networks) agreement with nbn. The company’s net cash balance grew by 85.1% to $19.5 million in FY20. The company’s statutory NPAT stood at $49.3 million in FY20, 1.1% lower than FY19, due to increased Depreciation and amortisation charges and impact from the adoption of AASB 16.

FY20 Results Highlights (Source: Company Reports)

Key Metrics: Over the past five-years, the company has reported decent improvement in margin performance. EBITDA margin for FY20 stood at 11.5% in FY20, higher than 11% reported in FY19. Current ratio for FY20 stood at 1.4x, higher than 1.2x in FY19, demonstrating that the company has improved its ability to pay short-term obligations.

Past 5-year Financial Performance for Year Ending 30 June 2020 (Data Source: Refinitiv, Thomson Reuters, Analysis by Kalkine Group)

Top 10 Shareholders: The top 10 shareholders together form around 32.36% of the total shareholding while the top four constitutes the maximum holding. Coen (Thomas) and TIGA Trading Pty Ltd are holding a maximum stake in the company at 9.38% and 5.33%, respectively, as also highlighted in the chart below:

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

Track Record of Paying Dividend: For FY20, the company has paid a final dividend of 5.0 cps on 1^st October 2020, taking the total full-year dividend to 9.0 cps (fully franked), representing an increased payout ratio of 74.2% based on Statutory EPS, compared to 68.8% in FY19. Over the last five years (2016 to 2020), the company’s dividend has increased at CAGR of 37.74%. At CMP of $1.750, the annual dividend yield of the company stands at 5.04%, higher than 5-year average (2016 to 2020) of 3.92%. It is worth noting that the company’s dividend payout ratio (based on Statutory EPS) has consistently increased over the last five years, as depicted in the below graph.

Dividend Trend (Source: Company Reports)

SSM Extends OMMA with nbn: On 13 October 2020, SSM announced that it had extended its Operations and Maintenance Master Agreement (OMMA) with NBN Co. for an additional 6-month period from the end of December 2020, with an option for nbn to extend for additional six months to December 2021. Under the contract, SMM will provide operations and maintenance field services for nbn, including service activations and service assurance activities.

Q1FY21 Trading Update: In an update on Q1 FY21, the company has informed that due to COVID-19 response and associated border restrictions, SSM is witnessing negative impact across some programs of work. The company has also informed that its results will be more noticeably biased to the second half than in prior years, reflecting an easing of COVID-19 restrictions towards the end of the year, expected resumption of slowed proactive maintenance programs across each division, progressive growth of work programs during the year, and new projects being secured and mobilised across each operating division.

Secured Multi-year Field Optimisation Agreement with Telstra: On 29 January 2021, the company announced that it has secured a multi-year agreement with Telstra, under which it will be responsible for performing design, construction and maintenance activities across Telstra’s wireless and fixed-line infrastructure networks. This agreement has come at a time where demand for 5G wireless infrastructure is expected to increase, making this long-term agreement strategically more important. The agreement is for an initial period of three years, with two x one-year extension options, at Telstra’s election.

Key Risks: The company is exposed to the risks and uncertainties caused by the COVID-19 pandemic. The company is also exposed to customer concentration risk due to its exposure to a small number of key customers and infrastructure programs, particularly within the telecommunications sector. As technology continues to change and evolve at a rapid pace, SSM is also exposed to digital disruption risks.

Outlook: As an essential service provider to utility and telecommunication asset owners, SSM is well placed to navigate through the COVID-19 crisis as well as to grow and diversify its operations. Moreover, it is well-positioned to continue to take advantage of both organic and acquisitive growth opportunities as they present. In the Telecommunications segment, the OMMA and NMRA contract extensions, as well as the recently secured multi-year Field Optimisation Agreement with Telstra continues to position SSM as the leading service provider in this segment, with further future prospects in 5G design and construction opportunities.

In FY21, the company’s annual earnings are expected to remain resilient, supported by SSM’s long-term contracts, but subject to continued work volumes from clients across existing contracts, and no further delays to planned programs due to COVID-19. SSM expects the demand for essential network services to remain strong in the medium-term. 

Valuation Methodology: EV/EBITDA 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: Over the last three months, the stock of SSM has corrected by 20.39% and is trading lower than the average 52-weeks price level band of $1.527 and $2.770, offering a decent opportunity for accumulation. On the technical analysis front, the stock has a support level of ~$1.527 and resistance ~$2.471. We have valued the stock using EV/EBITDA multiple based illustrative valuation method and have arrived at a target price of low double-digit upside (in % terms). We believe the company might trade at a slight premium to its peer average EV/EBITDA (NTM Trading multiple), considering its healthy contracted pipeline, positive outlook, strong demand for essential network services and also taking into account the that the company has been commanding a premium in the past 3-years over its peer median. We have taken peers like Vocus Group Ltd (ASX: VOC), Chorus Ltd (ASX: CNU), Telstra Corporation Ltd (ASX: TLS), to name a few. Considering the company’s decent performance in FY20, increased cash position, improved liquidity position, decent outlook and valuation, we give a ‘Buy’ recommendation for the stock at the market price of $1.750, down by 1.961% as on 4 February 2021.

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

Disclaimer

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