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 utility network teams provide engineering, asset and customer management services to Australia’s leading utilities and energy providers.

SSM Details

Strong Clientele Base to Support Organic Growth: Service Stream Limited (ASX: SSM) is a provider of essential network services across fixed-line and wireless telecommunications networks as well as to a range of water, gas and electricity network owners and operators nationally. As of 22^nd October 2020, the company’s market capitalisation stood at ~$897.37 million. The company has a strong clientele base with solid pipeline of organic growth opportunities across core markets. Over the last five years, the company has witnessed significant improvement in its top as well as the bottom line. From 2016 to 2020, the company’s revenue and NPAT have grown at a CAGR of 20.6% and 25.3%, respectively.

Looking ahead the company is focused on diversifying its revenues and increasing its addressable market. In FY21, the company expects continued demand for services across critical infrastructure networks throughout the Utilities and Telecommunications industries. The company expects its earnings to remain resilient in FY21, supported by its long-term contracts and continued work volumes from clients across existing contracts. 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.

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

FY20 Results Highlights: For the year ended 30^th June 2020, the company reported a 9% YoY growth in its Group revenue, which stood at $929.1 million. This was mainly due to 45.5% growth in Utilities segment revenue, offset by a 7.7% decline in Telecommunications segment revenue. Further, the company reported a 17.9% YoY growth in EBITDA, which stood at $105.6 million, driven by a favourable O&M work mix and the successful wind-up of nbn D&C operations.

During FY20, the company was benefitted from its exposure to essential infrastructure networks that provided a solid revenue base and resilience against the impacts of the COVID-19 pandemic. Over 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’s net cash balance grew by 85.1% to $19.5 million in FY20. Statutory NPAT stood at $49.3 million in FY20, 1.1% lower than FY19, due to higher depreciation and amortisation charges and impact from the adoption of AASB 16.

FY20 Results Highlights (Source: Company Reports)

Top 10 Shareholders: The top 10 shareholders have been highlighted in the table, which together form around 29.35% of the total shareholding. Coen (Thomas) and TIGA Trading Pty Ltd hold maximum interest in the company at 9.38% 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 2.7%. The company’s current ratio stood at 1.43x in FY20, higher than the industry median of 1.09x, demonstrating that the company is well equipped to pay its short-term obligations.

Key Metrics (Source: Refinitiv, Thomson Reuters)

Decent Track Record of Paying Dividend: 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 a payout ratio of 74.2% based on Statutory EPS. From 2016 to 2020, the company’s dividend has increased at a CAGR of 37.74%. 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 Secured Multi-Year Agreement with nbn: On 31st August 2020, SSM announced that it has secured a significant long-term unified field operations (networks) agreement with nbn Co., demonstrating the confidence that nbn has in SSM’s ability to provide critical network maintenance and upgrade services to the NBN. Under this long-term agreement, SSM will perform operations and maintenance activities across core network technologies, as well as other technologies that may be introduced in the future. 

SSM Extends OMMA with nbn: On 13 October 2020, SSM announced that it has 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.

AGM Highlights: On 21 October 2020, the company held its Annual General Meeting (AGM) with its shareholders, wherein it highlighted that due to COVID-19 response and associated border restrictions, SSM is likely to have a negative impact across some programs of work. The Management also informed that the results will be more noticeably biased to 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. 

Key Risks: The company is exposed to the risks related to the evolution of the COVID-19 pandemic and any escalation of the government’s response. The reduction in demand from the Group’s customers may also impact the company’s operations. SSM is also exposed to the risks related to the loss of business due to stiff competition.

Outlook: Looking ahead, the company is focused on growing and diversifying its addressable market and recurring revenue base. The company intends to reduce its dependency on Telecommunication segment and expand its utility capabilities and service offerings. Further, SSM is focused on maintaining its expansive client base of leading network owners and operators, regulators and government organisations. The company currently has a solid pipeline of telecommunication maintenance and project related works associated with new network expansions and existing infrastructure upgrades. In addition, it also has a decent pipeline of gas and water utility projects related works.

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. One of the main priorities of FY21 is to secure organic growth opportunities across utility and telecommunications operations. The company seems well placed to continue to take advantage of both organic and acquisitive growth opportunities as they present.

Key Valuation Metrics (Source: Refinitiv, Thomson Reuters)

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

EV/EBITDA 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: Over the past three months, the stock of SSM has provided a return of 20.1% and is trading lower than the average of 52-weeks’ price band, offering a decent opportunity for accumulation. On the technical analysis front, the stock has an immediate support level of ~$2.12 and a resistance of ~$2.40. We have valued the stock using the EV/EBITDA multiple based illustrative 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), Uniti Group Ltd (ASX: UWL), etc. Considering the company’s decent FY20 results, track record of paying regular dividends, diversified revenue base, robust balance sheet, and current trading levels, we suggest a “Buy” recommendation on the stock at the current market price of $2.180, down by 0.457% on 22 October 2020.

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

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