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A tight labour market and sticky inflation suggests that the Reserve Bank is not about to cut the cash rate. Indeed, it’s more likely the bank will lift it again – good news for those with cash and term deposits.
Is Service Stream’s 8% dividend yield sustainable?
Service Stream (ASX:SSM) is a company that operates in the background of an infrastructure project and is critical to the maintenance of that project.
The company is a constituent of the S&P/ASX 300 index, and provides integrated end-to-end asset life-cycle services to utility and telecommunications asset owners, operators and regulators across Australia.
To put that in context, SSM designs, builds, operates and maintains the assets across these networks. SSM delivers range of services across electricity, gas, water and renewable energy utilities, and fixed and wireless telecommunication networks.
Pre-pandemic, the shares were trading at around $2.75. Fast-forward to today, and SSM is trading near 2016 lows, at 92.5c. That’s a 66% share price fall. that hasn’t recovered post pandemic.
Why hasn’t SSM recovered, and is it attractive at these levels?
To answer that, we need to first look at what the company does and its outlook. Service Stream benefits from infrastructure spending. And a good example of massive infrastructure spend is the Federal Government’s NBN rollout.
The company managed to obtain agreements with NBN Co for the provision of service activations, operations and maintenance services for QLD, SA and NT. It seems to have missed out on Victoria and NSW, which explains the continuous share price fall. SSM is structured across three operating divisions: Telecommunications, Utilities and Transportation Infrastructure.
The above table outlines SSM’s main three business units and the various projects and customers it is currently working with. The company has an enviable list of blue-chip customers, which means the revenue it generates should be consistent. Its forecast revenue is evenly split between the three segments. In July, Lendlease (ASX:LLC) agreed to sell its services business to Service Stream (SSM) for $310 million. According to Macquarie, the deal was at a price in line with their valuation. The acquisition will be funded by a mix of debt and an equity raising at 90 cents a share.
Is it a Buy?
Service Stream appears to be announcement-driven and its share price tends to move on the back of a catalyst. Such a catalyst would be the winning of new infrastructure work, which depends on the health of the economy. Although revenue is reliable and largely on a recurring basis, there hasn’t been that catalyst to cause a turnaround in share price. SSM did, however, bounce 10.5% in July on the back of the Lend Lease announcement.
At these levels, Service Stream would seem attractive. It trades on a PE of 9.84 times earnings and has a dividend yield of 8.11%, with a return on equity (ROE) of about 12-20%. On the whole, Service Stream looks like a high-quality company that is fairly profitable, especially the high ROE. Looking at analyst expectations, many appear to think that the company’s growth is set to shrink. Many of these expectations, do not incorporate the Lend Lease acquisition or any potential new work.
While there might not be a catalyst on the horizon, at its current price, Service Stream appears a bargain by traditional terms. At the worst, the company may trade sideways, but it delivers a high dividend. At these levels, if the company is awarded any new work of significant value, expect a rapid recovery in the share price.
