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HY21 result: Service Stream (ASX:SSM) share price in the spotlight

The Service Stream Limited (ASX: SSM) share price will be on watch tomorrow after the company handed in its half-year results after the market closed on Wednesday.

Service Stream is an essential provider of network services to the telecommunications and utilities sectors across Australia.

It’s been tough going for the Service Stream share price in recent months, suffering a steep fall in mid-December after the company announced a long-term agreement with NBN Co.

SSM share price chart

Source: Rask Media 1-year SSM share price chart

NBN and COVID impacts persist

Service Stream described FY21 as a transitional year as revenue from NBN construction operations concluded and activations peaked in FY20.

The company’s first-half financial performance was down on the prior corresponding period (pcp), but management said it was in line with expectations.

Service Stream reported a near 18% fall in revenue to $409.9 million, driven by subdued performance in the telecommunications segment which saw revenue drop 30%. This came following the expected decrease in NBN activation volumes and the completion of NBN’s design and construction roll-out program in FY20.

The utilities segment was much more robust, achieving revenue in line with the pcp at $199.6 million. The segment achieved solid revenue growth across Comdain Infrastructure operations, but this was offset by lower metering revenue, primarily due to COVID-19 impacts.

Shifting our focus to earnings, Service Stream reported EBITDA from operations of $40.2 million, representing a 31% fall compared to the pcp.

Statutory net profit after tax (NPAT) suffered a steeper fall, tumbling 40% to $16.2 million as a reduction in subcontractor fees and other expenses wasn’t enough to offset the drop off in revenue.

Dividend takes a hit

Service Stream maintained its historical payout ratio of ~60%, declaring a fully franked interim dividend of 2.5 cents per share. This is down from the 4 cent interim dividend paid in the pcp.

Annualising the company’s HY21 dividend puts Service Stream shares on a forward dividend yield of roughly 2.9%.

The road ahead

Commenting on COVID-19, Service Stream noted that the evolution of the pandemic and escalation in the government’s response has negatively impacted its operations and near-term financial performance.

Increased restriction of movement within and across state borders, combined with snap lockdowns, has limited the company’s ability to effectively plan and move resources to support program delivery.

Service Stream initially expected a greater contribution in the second half of FY21, underpinned by increased proactive maintenance programs previously delayed by clients and the delivery of recently-secured new work programs.

However, following persistent impacts from COVID-19, the company now expects the second-half result to be relatively in line with the first half.

Looking ahead, chief executive Leigh Mackender remains upbeat, saying:

“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.”

Service Stream could be an option for income but if I were looking for dividends, I’d prefer to invest in a company with more stable operating conditions, such as Washington H. Soul Pattinson and Co. Ltd (ASX: SOL) which has an enviable dividend history.

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Afterpay, Zip Co, Sezzle…

Is BNPL the opportunity of a lifetime or is the sector a ticking time bomb?

Rask's analyst has just finished a 7,500-word report, The Ultimate BNPL Sector Report, taking a deep dive into this booming ASX sector. It shines a spotlight on each of the major players. You can get the full analyst report for FREE by CLICKING HERE NOW.

Note: the report is 100% free.

Disclosure: At the time of publishing, Cathryn owns shares in Soul Patts.

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