Focusing On Core Telco And Smart Energy Will Strengthen Outlook Despite Contract Risks

Key Takeaways

• Strategic divestment and focus on core markets poised to enhance revenue growth in telco and smart energy sectors.
  
• Partnership extensions and potential new contracts ensure a stable revenue base with growth prospects.
  
• Discontinuation of non-core operations, expiring contracts, customer reliance, debt management, and slow market growth introduce revenue and financial flexibility risks for BSA.

Catalysts

Offers communications and utilities infrastructure, and property solutions in Australia.

• BSA's divestment of noncore businesses allows for a strategic focus on core telco and smart energy markets, which is expected to drive revenue growth in these sectors.
  
• The company's entry and potential expansion in the emerging EV market could lead to significant revenue growth as the market develops.
  
• Improved operational efficiency and cost management, as indicated by margin improvements, suggest an opportunity to increase net margins moving forward.
  
• The strategic partnership extensions with major clients like Foxtel and potential contract renewals with nbn provide a stable revenue base and growth opportunities.
  
• The successful execution of the company's transformation phase and improved financial performance, measured through increasing EBITDA figures, suggest future earnings growth potential.

BSA Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming BSA's revenue will grow by 9.9% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 7.4% today to 4.8% in 3 years time.
• Analysts expect earnings to reach A$16.2 million (and earnings per share of A$0.21) by about February 2028, down from A$18.9 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 10.5x on those 2028 earnings, up from 4.1x today. This future PE is lower than the current PE for the AU Construction industry at 17.5x.
• Analysts expect the number of shares outstanding to grow by 0.48% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.13%, as per the Simply Wall St company report.

BSA Future Earnings Per Share Growth

Risks

• The discontinuation of operations in the Fire division resulted in an EBITDA loss of $4.2 million, which highlights potential risks related to managing non-core business areas and could impact overall earnings.
  
• The retender process for the nbn contract, which is set to expire in January 2025, introduces uncertainty that could affect revenue stability if the contract terms or conditions change unfavorably.
  
• The company's reliance on significant customers such as Foxtel, whose strategic direction includes shifting to streaming and potential ownership changes, could pose revenue risks should demand from this client decrease.
  
• The incremental net debt of $6.4 million due to final class action payments and other legacy items could affect the company’s financial flexibility and impact net margins if not managed effectively.
  
• The slower growth of the Australian EV charging infrastructure market adds uncertainty to future revenue growth expectations from BSA’s smart energy sectors, including EV solutions.

Valuation

• The analysts have a consensus price target of A$1.85 for BSA based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be A$339.2 million, earnings will come to A$16.2 million, and it would be trading on a PE ratio of 10.5x, assuming you use a discount rate of 7.1%.
  
• Given the current share price of A$1.02, the analyst price target of A$1.85 is 44.6% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.