Stock: Service Stream Limited
Stock code: SSM
Share Price: $0.55 (as at 4pm 27/05/11)
Broker Buy Recommendations:
Intersuisse (23rd May 2011, share price was $0.56 that day)
Citigroup, target price $0.71 (16th May 2011, share price was $0.53 that day)
Wilson Asset Management (13th May 2011, share price was $0.545 that day)
Austock, target price $0.70 (13th May 2011, share price was $0.545 that day)
Investor Centre: Service Stream
Company news: Service Stream
Chart: Share price over the year to 27/05/2011
For those who backed Service Stream (SSM) over the past year it’s been a stellar run – with the share price tripling from 25 cents in July 2010 to a high of 79 cents on 21st February this year. Since then Service Stream shares have been on a slippery slope, sliding 30 per cent and are now trading at 55 cents. Whichever way you look at it, it’s still a far cry from the lofty $2.00 share price it boasted at the end of 2007.
However several brokers think that SSM is looking undervalued, including Intersuisse, Austock and Citi. With the expectation that full-scale NBN construction will commence in FY12, SSM is well positioned to pick up some large contracts over the coming years. Recent contract wins such as the $300 million Origin Energy contract have been a boon for the company as it gets back on its feet after an ordinary few years – during these dark times the share price plunged from more than $2.00 to just 20 cents in less than 18 months. This turnaround was achieved via SSM’s management successfully executing its strategy in 2010 to focus on cash flow and by exiting unprofitable contracts.
SSM has recently won a $35 million NBN contract with Fujitsu to rollout fibre infrastructure to new stgelopments. The initial contract period is for 12 months with an option to extend for a second year and Service Stream estimates the contract value to be $35m pa. There is a caveat, in that installation volumes are not guaranteed and may vary substantially over the life of the contract. The good news is that work has started and the contract makes total revenues less dependent on their one major customer – Telstra.
SSM is a provider of specialist end-to-end services to the telecommunications and utilities sector in the areas of asset management services, contact centre activities and logistics, construction, design and technology solutions, and fixed line and wireless infrastructure design, maintenance, deployment and management.
During the fiscal year ended June 30, 2008, SSM also added capabilities in the reading, maintaining, installing and exchanging of meters in the water, gas and electricity sectors. SSM has three segments: Contact Centre Solutions, Field Services and Infrastructure Services.
Service Stream’s growth strategy focusses on stgeloping its services to meet the ever-changing needs of large national infrastructure-based firms in the telecommunications and utilities sectors. Growth from its existing businesses is expected to continue and environmental focused infrastructure projects are forecasted to become increasingly important to the company. SSM led the introduction of smart meters last year and is now well positioned to draw revenues from utility companies.
Net profit was $7.79 million for the six months to December 31 compared with a loss of $8.65 million in the prior corresponding period, Melbourne-based Service Stream said in a statement on Tuesday.
Revenue rose 12.7 per cent to $300.33 million, driven mainly by the company’s specialist field services division on the back of new environmental programs with Origin Energy Ltd and Local Government Infrastructure Services. The company didn’t pay an interim dividend, but said it was optimistic about its prospects in the medium term on a rebound in demand for its services.
Service Stream also said it may get a tax refund of as much as $12.1 million which would add to the profit figure.
Link to company Earnings Report: Service Stream Limited Half Year Earnings Report – to Dec 31st, 2010
Instersuisse’s Cameron Bell has a buy on SSM as he believes that the company is set to experience considerable revenue growth yet currently the stock remains quite cheap. “Uncertainty surrounding the National Broadband Network has recently hampered the stock, but the company is nonetheless going to benefit greatly from spending associated with the NBN, environmental and power usage initiatives and the continuing rollout of improving wireless networks,” he says.
Citi has target price of $0.70, a premium of 27% to Friday’s closing price, although it still rates it as a high risk stock. Citi says that SSM has successfully executed its strategy in 2010 after a difficult 2009. “Significant growth opportunities exist through the NBN and Government Environmental programs but these are subject to delays and remain longer term,” it says. Its target price of $0.71 is based on a weighted average of a PE and EV/EBITDA valuation. “We apply a 15% discount to the market multiple (Small Ordinaries) given risks around contract delays and the weighting of major customer Telstra. We have lowered this from 25% previously as the company has successfully focused on cash flow generation and won new contracts post the capital raising in 2009.”
Meanwhile Austock have upgraded SSM from a buy to high conviction buy, and also have a price target of 70 cents – without getting any NBN work. With NBN the target is lifted to 90 cents. “An investment in SSM stacks up without NBN in our view, with NBN providing the X factor,” says Austock in a research note. “Mobile, solar, smart meters are all drivers in 2H’11, partially offset by declining Telstra maintenance work. Excluding NBN, our DCF valuation is $0.70/share. Including NBN on a 33% (inclusion) risk weighted basis, our DCF valuation is $0.91/share, offering 73% upside to the current share price. With the share price falling 33% from highs, we
upgrade our recommendation to Conviction Buy (from Buy).”
Citigroup rates Service Stream as a “High Risk” stock based on a number of quantitative and fundamental screens. The main stock-specific risks facing SSM, according to Citi, which may prevent the share price achieving their price target include:
– Large proportion of revenues and EBITDA concentrated in a small number of large customers;
– Possible delays or deferrals of telco capex;
– Increasing working capital demands for large projects;
– Pricing competition increasing which could result in lower margins;
– Lower-than-expected growth opportunities in metering and the National Broadband project.
SSM’s recent new contracts with Origin and Fujitsu show that the company has what it takes to grow its revenue stream, which will be of the utmost importance when it comes to securing new NBN contracts – when NBN ultimately rolls out. Although analysts see this rolling out mid-next year, there is still a lot of uncertainty around NBN, and therefore SSM’s growth. Should there be minimal delays to NBN and should SSM be successful in picking up new contracts then there is plenty of upside for this stock. Even without NBN, the company appears to be in good shape, with new deals that has Austock valuing them at $0.70 without NBN. Nevertheless this is a speculative small-cap that history shows is subject to wild flucatuations in its share price, which is why Citi has it as a High Risk stock.
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