Service Stream Limited

Company Overview: Service Stream Limited (ASX: SSM) is a provider of integrated end-to-end asset life-cycle services across essential infrastructure networks within the Telecommunications and Utilities sectors. It also provides a range of maintenance services across both fixed-line and wireless technologies. Further, it remains focused on providing superior service delivery and execution for its valued clients. Service Stream Limited promotes increased use of data analytics and Business intelligence tools to drive improved business outcomes. For Australia’s digital wireless network providers, SSM manages engineering design and construction for build-only projects and provides full end-to-end services.

SSM Details

5-Year Financial Summary (Source: Company Reports, Thomson Reuters)

Due to the vital nature of the company’s services, SSM was able to continue its operations despite various lockdown restrictions imposed to manage the COVID-19 pandemic. It is worth noting that the demand for essential network services has remained firm throughout the pandemic, and SSM’s earnings have not been significantly impacted by COVID-19 restrictions. SSM continues to benefit from its strategy of progressively diversifying across critical utility infrastructure markets as these markets hold positive long-term outlook associated with increased urbanization, and consistent expenditure associated with maintaining and upgrading critical infrastructure. In FY21, the company expects its earnings to remain resilient, supported by its long-term contracts. With a robust balance sheet combined with a significant contract base of strong annuity-style revenues, exposed to essential infrastructure networks, the company seems to be well placed to deliver consistent performance in the future.

FY20 Result Highlights: For the year ended 30 June 2020 or FY20, the company reported total revenue of $929.1 million, up 9.0% on the previous year, mainly driven by the growth in the Utilities segment. Revenue from the Telecommunications services stood at $544.2 million in FY20, down by $45.2 million on the previous year, due to the successful conclusion of the Company’s nbn D&C operations in addition to clients delays in commencing a number of wireless projects due to the COVID-19 pandemic. Revenue from the Utilities segment stood at $384.1 million in FY20, up $119.8 million on the previous year, due to the inclusion of a full year of revenue from Comdain Infrastructure.

Further, the company reported EBITDA from operations of $108.1 million, up by 15.9% on FY19. The company’s statutory NPAT stood at $49.3 million in FY20, down by 1.1% on FY19. During the year, the company generated $86.4 million of operating cashflow before interest and tax, up 8.5% on the previous year. The EBITDA to OCFBIT conversion ratio stood at 81.9% in FY20, with better than expected working capital outcomes delivered across both the Telecommunications and Utilities segments.

During the year, the company successfully secured over $200 million in future annual revenues through contract extensions or new agreements across its utility operations. The company secured and mobilized new long-term contracts with Sydney Water and Queensland Urban Utilities during FY20. The company declared a final dividend of 5.0 cps, taking the total FY20 dividend to 9.0 cps, in line with the previous year. At the end of FY20, the company had a robust balance sheet with a net cash position of $19.5 million, comprising cash-on-hand of $79.5 million net of borrowings of $60.0 million.

FY20 Key Results (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together forms around 29.37% of the total shareholding. Coen (Thomas) and TIGA Trading Pty Ltd hold maximum interest in the company at 9.42% and 5.55%, respectively.

Top 10 Shareholders (Source: Refinitiv, Thomson Reuters)

Key Metrics: For FY20, the company’s gross margin stood at 94.1%, higher than the industry median of 14.7%. For the same period, the company’s net margin stood at 5.3%, higher than the industry median of 2.6%. The company has a ROE of 15.7%, higher than the industry median of 9,4%. Further, the company has a current ratio of 1.43x, higher than the industry median of 1.1x, demonstrating that it is well equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Track Record of Paying Dividend: The company has a decent track record of paying regular dividends to its shareholders. For the second half of FY20, the company has declared a final dividend of 5 cps, taking the total FY20 dividend to 9 cents per share, reflecting a payout ratio of 74.2% based on Statutory EPS. The final dividend is payable on 1 October 2020. From 2016 to 2020, the company’s dividend has increased at a CAGR of 37.74%.

Dividend Summary (Source: Company Reports)

COVID-19 Impacts: Due to COVID-19 pandemic, the company has witnessed some negative impacts, largely associated with increased costs to safely deliver field-based operations; some clients temporarily pausing some work programs; and the delayed commencement of individual minor projects. Some customers have also initiated moratoriums on electricity and gas disconnections. Despite this, the company’s earnings have not been significantly impacted. In response to COVID-19, the company had implemented a range of protocols to minimise the spread of the virus while supporting its clients’ programs of work and the continuity of its field operations.

Key Risks: The evolution of the COVID-19 pandemic and any escalation of the government’s response can impact the company’s operations. Further, the potential variability in customer demand presents operational challenges to the company. As technology continues to change and evolve at a rapid pace, it is possible that such advances may cause disruptions to certain elements of the markets in which the company operates, or to services that Service Steam provides.

What to Expect: SSM continues to benefit from its strategy of progressively diversifying across critical utility infrastructure markets as these markets hold positive long-term outlook associated with increased urbanization, and consistent expenditure associated with maintaining and upgrading critical infrastructure. In FY21, the company expects its earnings to remain resilient, supported by its long-term contracts, subject to continued work volumes from clients across existing contracts and resumption of programs of work previously delayed by clients due to COVID-19 restrictions.

Going forward, the company will maintain its focus on securing organic growth opportunities from a significant and expanding internal pipeline, re-securing agreements which are due to expire, and further progressing strategic growth opportunities aligned with its core sectors, supporting ongoing growth and diversification. One of the key priorities for FY21 is to secure an agreement with nbn for Unified Field Operations to support ongoing operations and maintenance revenues. Currently, the company is in a decent liquidity position, providing support for ongoing investment in growth and strategic expansion. With a robust balance sheet combined with a significant contract base of strong annuity-style revenues, exposed to essential infrastructure networks, the company seems to be well placed to deliver consistent performance into the future.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

Valuation Methodology: EV/EBITDA Multiple Based Relative Valuation (illustrative)

EV/EBITDA Multiple Based Relative Valuation (Source: Refinitiv, Thomson Reuters)

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

Stock Recommendation: On a YTD basis, the stock of SSM has corrected by 31.85% and in the past six months it has corrected by 12.8%. The stock is currently inclined towards its 52 weeks low of $1.535, offering a decent opportunity for accumulation. On the technical analyses front, the stock has a support level of ~$1.7 and a resistance level of ~$2.2. With a strong base of contracted revenues across a stable and dependable client base of utility and telecommunications asset owners and operators, the company seems to be well-positioned to navigate through the impacts of the pandemic. We have valued the stock using the EV/EBITDA multiple based illustrative relative valuation method and have arrived at a target price of low double digit-upside (in % terms). For the purpose, we have taken peers like Vocus Group Ltd (ASX: VOC), Chorus Ltd (ASX: CNU) and Telstra Corporation Ltd (ASX: TLS). Considering the company’s decent FY20 results, firm demand for essential network services, FY21 focus areas, the company’s long-term contracts, and current trading levels, we give a “Buy” recommendation on the stock at the current market price of $1.855, up by 0.815% on 27 August 2020.

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

Disclaimer

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