Service Stream Confident Dividends Will Flow

Australia | May 28 2020

Service Stream has been hampered by the pandemic, having to add costs to ensure the safe delivery of field-based operations. On the positive side, the company is confident it will maintain its progressive dividend policy.

-Most likely impact is on Comdain and work on Victorian housing estates
-Balance sheet, cash flow and liquidity remain strong
-Impact of new protocols likely to continue into FY21


By Eva Brocklehurst

Delays and deferrals across telecommunications and utilities networks have meant Service Stream ((SSM)) has reduced FY20 earnings guidance, amid further costs associated with ensuring the safe delivery of field-based operations while hampered by the pandemic.

Macquarie assumes some of the weakness relates to clients being reluctant to pursue projects and interrupt connections in both the utility and telecommunications networks while a large proportion of Australia works from home.

The company has provided few details as to where exactly the revenue reductions are occurring but Bell Potter assumes the most likely impact is on Comdain and the work in Victorian housing estate developments.

Metering services are also affected by the inability of utility providers to disconnect and then subsequently reconnect services, Canaccord Genuity points out. The most impact is being felt in relation to mobile network upgrades and maintenance which fall into the wireless category.

The company is being subjected to weak investment in 5G by all mobile operators and the deferment of upgrades as well as a shortage of required materials. Canaccord Genuity reduces forecasts for wireless revenues to $65m from $80m for FY20 as a result, retaining a Buy rating and $2.60 target.

The broker deems the broader business is sound and the balance sheet should reflect a net cash position by June 30. Moreover, despite lower revenues, margins remain fairly stable.

The company expects to report $108m in operating earnings (EBITDA) for FY20 and Ord Minnett reduces forecasts for FY21 as well, to $105m, the strong balance sheet and expectations a progressive dividend policy will be maintained, sticking with a Buy rating and $2.65 target.

In Bell Potter's view, Service Stream is now in a perfect position as a stable, high yielding essential services play. Still, protocols being introduced as a result of the pandemic is a recurring theme amongst engineering & construction contractors and one the broker expects will continue in FY21.

Yet Bell Potter does not consider the impact material as the company's balance sheet, cash flow and liquidity all remain strong and, given a healthy fully franked yield of 4.6%, maintains a Buy rating with a $2.50 target.

The broker also notes the company has given a commitment to dividends in a period where traditionally stable infrastructure stocks such as Transurban ((TCL)) and Sydney Airport ((SYD)) have pulled back expectations, and banks have cut dividends dramatically.

Macquarie agrees, on a relative basis, if guidance is achieved this could be a good outcome. As restrictions ease, the impact is still likely to continue into the first quarter of FY21 and the broker expects flat operating earnings in FY21, retaining an Outperform rating and $2.88 target.

Macquarie also highlights investors should not underestimate the fact Service Stream has not been a beneficiary of stimulus packages such as JobKeeper to support earnings and cash flow.

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