Securing AUD 59 Billion In New Contracts Will Provide Future Revenue Stability

Key Takeaways

• Significant new contracts and renewals enhance revenue growth, offering stable income and reduced risk with improved earnings visibility.
  
• Focus on capital-light strategic acquisitions and a robust cash flow position supports diversification, market expansion, and long-term profitability.
  
• Reliance on nbn contracts poses revenue risks, while competitive bidding and acquisitions could impact earnings if not managed correctly.

Catalysts

Engages in the design, construction, operation, and maintenance of infrastructure networks across the telecommunications, utilities, and transport sectors in Australia.

• Service Stream has successfully secured several significant new contracts and renewals, increasing its work-in-hand balance to A$5.9 billion. This positions the company well for future revenue growth as these low-risk annuity-style contracts provide stable and predictable income streams.
  
• The Utilities division has demonstrated strong operational improvements, with a 38% increase in EBITDA and margin improvements from 3.4% to 4.2% over the last year. This continued improvement is expected to drive higher net margins and support overall group profitability.
  
• The company's emphasis on securing operations and maintenance contracts, which now constitute 87% of their work-in-hand, reduces risk compared to lump sum contracts and offers improved earnings visibility, which is likely to positively impact revenue stability and efficiency.
  
• Service Stream is focused on capital-light strategic acquisitions to broaden their service offerings and expand into adjacent markets. This strategic expansion is designed to enhance revenue growth and earnings potential through diversification and increased market coverage.
  
• The group's strong cash flow position and balance sheet allow for reinvestment in growth opportunities, further optimizations, and shareholder returns via an increased dividend. This financial flexibility supports long-term revenue generation and potential for enhanced earnings through strategic investments and operational improvements.

Service Stream Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Service Stream's revenue will grow by 5.1% annually over the next 3 years.
• Analysts assume that profit margins will increase from 2.2% today to 2.7% in 3 years time.
• Analysts expect earnings to reach A$73.2 million (and earnings per share of A$0.12) by about March 2028, up from A$52.6 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 20.1x on those 2028 earnings, down from 20.6x today. This future PE is greater than the current PE for the AU Construction industry at 14.9x.
• Analysts expect the number of shares outstanding to decline by 0.13% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.34%, as per the Simply Wall St company report.

Service Stream Future Earnings Per Share Growth

Risks

• The Telecommunications segment's reliance on nbn maintenance agreements involves significant uncertainty, and potential loss of these contracts could impact revenue growth and net margins.
  
• Seasonal weather events could further impact the Utilities segment's operations, potentially affecting revenue predictability and profit margins.
  
• Continued reliance on competitive bidding for government and nbn projects means potential shifts in win rates, impacting future revenue growth and profit stability.
  
• Strategic acquisitions mentioned without specifics could pose integration risks or overvaluation concerns, potentially impacting earnings if not managed properly.
  
• While interest rates and cash position remain favorable, any significant change in financing conditions or unexpected capital needs could affect net earnings due to increased financial costs.

Valuation

• The analysts have a consensus price target of A$1.958 for Service Stream 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$2.8 billion, earnings will come to A$73.2 million, and it would be trading on a PE ratio of 20.1x, assuming you use a discount rate of 7.3%.
• Given the current share price of A$1.78, the analyst price target of A$1.96 is 9.4% higher.
• 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.