Despite the recent rally in Service Stream, is it still cheap?
In 2019, the Service Stream (ASX: SSM) share price has risen by 24 per cent to around $2.17, and for the half-year to December 2018, the Company has reported an excellent set of numbers.
Over the past 8.5 years, Service Stream has consistently grown its revenue by an average annual 15 per cent from $197 million to $348 million and its EBITDA by an average annual 38 per cent from $10.7 million to $38.7 million.
Service Stream grew up servicing the telecommunications industry. Mobile network owners and operators increasingly outsourced the management of towers and digital broadcast sites (Network Construction Division), while the owners of fixed telecommunications networks made up of copper wire and fibre-optic cables have also become increasingly reliant on the likes of Service Stream for design, construction, maintenance and management (Fixed Communications Division).
Over time, Service Stream has slowly broadened its business model to also focus on utility customers (Energy and Water Division). Services include installation of in-home displays, smart metres, solar PV systems and managing service faults (electricity); the maintenance and management of user connections to their gas networks (gas); and providing a variety of water-related services including metre installation and reading and local emergency repairs to residents and businesses (water).
Telecommunications accounted for around 85 per cent of group revenue, however the recently consummated Comdain Infrastructure acquisition for $162 million (40.2 million shares X $1.692 per share and $94 million of cash) will add $320 million to the revenue line and $22 million to EBITDA. The acquisition enhances Service Stream’s capabilities in the East Coast Utilities market, given Comdain Infrastructure has grown its business by an annual average 20 per cent over the past five years, has a blue-chip client base and there is no duplication of services or contractual agreements across common clients.
Service Stream’s annualised revenue should exceed $1 billion revenue in 2019 and this will be split Telecommunications 57 per cent and Utilities 43 per cent, while annualised EBITDA is expected to approach $100 million.
Post the acquisition, Service Stream will have around $30 million of net debt, and with 401.4 million shares on issue, the enterprise value (at $2.17 per share) is $900 million. The vendors of Comdain Infrastructure own 10 per cent of Service Stream, and their Chairman, Tom Coen, has joined the Board of Directors. Shareholders’ Funds approximate $290 million, and a forecast normalised Net Profit after Tax of $63 million (for calendar 2019) implies a Return on Equity of 21.7 per cent.
With an estimated earnings per share of 15.7 cents, Service Stream is selling on a prospective PE of 13.8X and, despite the recent share price rally, this seems a little cheap to me given both businesses’ excellent track record, the greater diversification in earnings (including reduced reliance on the NBN), the increased annuity style revenue and the negligible indebtedness. The only question mark which will be answered with time is the cultural fit of the two organisations.