Hi @Macchi. I've now dumped Service Stream because I've lost faith in their management. I had previously thought they had superior management to the other players in their industry segment - their main competitors are BSA (ASX:BSA) and Downer (ASX:DOW). Downer is selling off all of their non-core business units, and I'm guessing they consider their NBN/Foxtel/Telco installation and maintenance division non-core. I further note that Downer did not win any new work in the latest round of NBN awards. They last announced an NBN contract in August 2020. I have invested in BSA three times, and lost money on two of those occasions. I have invested in SSM twice, and lost money on the most recent occasion - I sold out on Thursday at $1.49, but had to take $1.15 here on Friday as my exit price for the SSM on my Strawman.com scorecard, as I have mentioned elsewhere, due to the requirement here to take daily closing prices only.
Regarding the NBN (nbn) work, firstly the NBN roll out is now virtually complete and the work is transitioning to maintainance contracts, not installation contracts, and SSM made it clear in their outlook statements that they are very unsure how that is going to play out for them in terms of how much work these new agreements are going to generate for them. One thing is clear however, they do NOT expect to be getting anywhere near as much revenue from the NBN as they were previously, despite having agreements that do cover every Australian mainland state and territory. The issue is regarding the zones within each of those states, specifically Vic and NSW. It is now very clear that BSA have won the Melbourne and Sydney greater metrolpolitan areas and that's a HUGE chunk of Australia's population. While SSM still have work in Vic and NSW, it sounds like it is in regional areas and other cities outside of the capital cities, plus it is basically maintenance if and when the NBN require it. SSM also do not sound too optimistic about being able to fill the revenue gap that has been created by the end of the NBN roll-out and the transition to these new "Unify Networks" and "Unify Services" maintenance contracts for the NBN. Here are a couple of quotes from their announcement on Thursday (25-Feb-2020) - the emphasis (bold type) has been added by me:
The Group had expected a higher contribution during the second half of FY21, driven by increased proactive maintenance programs previously delayed by clients and the delivery of new work programs recently secured. Current trading conditions and continued COVID impacts, largely associated with client-initiated delays to work programs and shortages across client supplied materials, coupled with restrictions on movement and interstate travel bans, are now expected to continue for the reminder for the year. Additionally the business remains cautious to the transition of the existing nbn OMMA contract to the new nbn Unify Services model which is expected to occur in Q4 and how this may impact positively or negatively on work volumes.
The Group therefore expects the second-half result to be approximately in-line with the first-half.
Whilst these results are subdued, the business continues to demonstrate strong fundamentals and has benefitted from our strategy to progressively diversify across critical utility infrastructure markets and to expand our service offerings. These markets are well understood by Service Stream, and hold positive long-term outlooks associated with increased urbanisation and consistent expenditure associated with maintaining and upgrading critical infrastructure.
The business has a strong pipeline of organic growth opportunities linked to our core markets, and will continue to adopt a measured approach to assessing potential external growth opportunities, ensuring they will enhance the Group’s long-term performance.
Managing Director, Leigh Mackender said: “FY21 represents a transitional year for the business with several major agreements up for renewal and the nature of these agreements changing into the future. We manage Service Stream for the long term, focussing on driving and supporting strong business fundamentals whilst positioning the Group to achieve future growth.
The business is working to secure both organic and external growth opportunities across our current markets that will assist to replace the decline in telecommunication related earnings into the future, across a diversified revenue base.
The Group’s diversification strategy into utilities is progressing well with Comdain Infrastructure securing several programs of work over the past 6 months and is on track to achieve 15% growth in FY21.
Service Stream’s core fundamentals in terms of its profitability, balance sheet, quality of earnings and bluechip client base remain strong. The business holds a solid order book of future contracted revenues and continues to work on securing additional growth opportunities, both organically and through acquisition, which will support the business to grow into the future.”
--- ends ---
It sounds like it's not just the NBN work that is substantially declining. They state that they have other agreements coming up for renewal in the current FY.
Their net profit margin for H1 of FY2021 was a smidge under 4% ($16,241,000 NPAT as a percentage of total revenue of $409.9m), so they are profitable, but not by much.
That wouldn't be too bad if they said that result was down to COVID and they expected a stronger second half. However, they have said that they HAD expected a stronger 2nd half but they NOW expect the second half to be much the same as the first half. That's the kick in the guts for shareholders. They HOPE to be able to replace the lost telco revenue in future years, but not this FY. And there are clearly no guarantees. That is a statement of hope, not official guidance.
My feeling is that at current levels, Despite the headwinds they face (which are significant), Service Stream has been oversold. That the market has overreacted to the downside, as they tend to do. However, I actually also thought that BEFORE they reported on Thursday (when they were trading at over $1.70), hence I was holding SSM shares leading into that result. I thought the same thing on Thursday night, after I had sold all of my SSM shares out of my real life portfolios and tried and failed to dump them from my Strawman.com portfolio (foiled by the closing auction). But I know that when a company has a very poor market reaction on the back of what is clearly much worse news than the market (and I) had been expecting, the stock is likely to keep heading south for some time. Certainly the immediate risk is more to the downside. They might have some sort of a bounce-back, but it's not going to be back to where they were trading on Tuesday (@ $1.70). Not everybody reacts on the day. Some wait for the broker and analyst updates, and they were clearly going to be downgrades. There were, however the downgrades were down to prices that were still higher than where SSM landed after the market's savage reaction to Thursday's report:
Macquarie - 26/02/2021: Neutral, Target: $1.40
Service Stream's first half was broadly in line with Macquarie forecasts at the operating income and net profit lines. Margins were down -40bps versus last year in utilities to 7.4% and down -150bps to 13.7% in telco.
Macquarie expects the second half to be roughly in-line with the first half due to continued covid impact and the current trading conditions. The broker also assumes Service Stream will be a beneficiary of the nbn works to be awarded from the federal budget spend over FY22-23.
Neutral rating with the target declining to $1.40 from $2.01.
Target price : $1.40 Price : $1.15 (26/02/2021) Gain to target $0.25, or 21.74%.
(excluding dividends, fees and charges - negative figures indicate an expected loss).
Ord Minnett - 25/02/2021: Buy, Target: $2.06
First half operating earnings beat Ord Minnett's forecasts with the result driven by a strong performance in Comdian and the broader utilities business. This was backed by contract wins and national expansion.
A similar performance is expected in the second half. Ord Minnett observes the company's cash position provides options on the balance sheet for adding to the service mix via M&A. Buy rating retained. Target is reduced to $2.06 from $2.21.
Target price : $2.06 Price : $1.34 (25/02/2021) Gain to target $0.72, or 53.73%
(excluding dividends, fees and charges - negative figures indicate an expected loss).
--- end ---
Those are the only two brokers who are currently covering SSM according to FNArena. There is clearly upside from here according to both of them, particularly Ord Minnett. Macquarie's TP of $1.40 sounds reasonable enough, but Ord's $2.06 target price sounds wildly optimistic to me. I imagine Service Stream would have to announce a LOT of new work for the market to send them back up over $2/share. They were last trading at those levels in mid-December before SSM lost the Melbourne and Sydney NBN contracts to BSA. Things are looking worse for them now than they were then, so I think we're going to need quite a bit of positive news to push SSM back up to those levels.
Service Stream's NPAT and Dividends are both down by around 40% for the half, and they have now guided for a similar second half, which is a lot worse than the upbeat assesment they gave at the AGM a couple of months ago. If things have deteriorated that much in such a short period of time, are they likely to get worse or better in the near term? Downgrades usually come in threes, not just one or two of them. The market is assuming things are even worse than what SSM management is now saying, and that's a fair assumption considering that management teams usually see their job as being (at least partly) to put the most positive spin possible on any bad news. As many wise people have said, including Andrew (Strawman), "Hope is not an investment strategy". SSM are basing their future return to their glory days mostly on hope it seems to me - mostly the hope of winning more work to replace the work they have already lost and the work they are expecting to lose.
I had a smallish investment in SSM because I thought they were oversold in December (I bought in after the drop in December), but I was clearly wrong on that call, and now I'm out. I can't back SSM management any more because I've lost faith in them. I think they should have clearly spelled out in December how the loss of the Melbourne and Sydney NBN contracts to BSA was likely to impact them. They did NOT do that, and the market assumed the worst, and in this case the market was right. Now I'm not sure the market is right to mark SSM all the way down to $1.15/share, where they landed on Friday afternoon, but I can't blame people for dumping the stock. I have. I'll have a look at them again if and when they turn the business around, but for now they've got too many headwinds and they are losing work (key contracts) to their main rival, BSA. That's my take on it anyway, for what it's worth. Hope that helps @Macchi.