Centennial Asset Management: Service Stream

Service Stream provides services, predominately labour, to the large telecommunications, retail energy and water industries. The work performed by Service Stream includes connection and maintenance of the national broadband network, building and maintaining mobile phone networks across Australia, the installation and maintenance of smart energy metres and the preservation of water infrastructure. The bulk of Service Stream’s customers are large enterprises such as Telstra or major government owned entities. The bulk of the services are carried out on behalf of Service Stream by contracted skilled labour.

Service Stream’s fortunes have, in recent years, revolved around the evolution of the National Broadband Network (NBN). Initially chosen to help build, connect and maintain the NBN network, the company saw its share price rise seven times from late 2014 to mid-2019. Since then however, as the NBN has neared completion of the original build, the Service Stream share price halved, with investors reducing the price earnings ratio from approximately 19 times future earnings to around 12 times. Driving the negative sentiment was the perceived earnings cliff associated with the NBN work ending.

In recent times however, the fortunes of Service Stream have started to improve. In late August, the company announced a new eight-year contract maintenance agreement with NBN. This was closely followed by the Federal government announcing it would spend an extra $4 billion on improving the NBN. This should placate in regard to an imminent earnings cliff.

In the meantime, the management of Service Stream has done a great job in diversifying the earnings of the company, expanding into the services of energy and water, both much larger overall markets than telecommunications. This now represents over 40 per cent of the company’s revenue. We would expect the company to push further down this path by using its strong balance sheet to make acquisitions in the non-telecommunication service areas.

While the company will always carry the risk of big chunky customers, the management team is best of breed and is working hard to grow earnings while mitigating overall risk. The financial 2021 year will be a consolidation year for the company’s earnings but with new contracts and growth in the non-telco areas, earnings should grow strongly from financial year 2022 onwards. With a price to earnings multiple of 14 times, we think it is worth owning.

This information has been prepared and provided by Centennial Asset Management. To the extent that includes any financial product advice, the advice is of a general nature only and does not take into account any individual’s objectives, financial situation or particular needs. Before making an investment decision an individual should assess whether it meets their own needs and consult a financial advisor. This stock pick was published on 15 October 2020 and is subject to change.