Yesterday, construction and maintenance services provider Service Stream Limited (ASX: SSM) reported its full-year results for 2016. Revenue rose 6.7% to $438.9 million and earnings-per-share (EPS) soared 70.9% to 5.2 cents.
Dividends-per-share (DPS) increased 66.6% to 2.5 cents and so the stock trades on a 2.7% dividend yield at current prices. The company also paid a 5 cent capital return during the year.
Earnings before interest, tax, depreciation and amortisation (EBITDA) margins increased to 8.2% from 6.2% in 2015. The company has improved margins in recent years thanks to a more favourable project mix and higher employee utilisation rates due to growing revenues.
Operating cash flow was an astronomical $62.3 million, more than three times reported net profit after tax (NPAT) of $20 million. Consequently, net cash jumped from $14.8 million to $41.1 million, despite the fact that the company paid out $27.1 million to shareholders during the year. Last year was a similar story, with operating cash flow of $32.3 million compared to $11.7 million NPAT.
The reason that cash flow has been so much higher than profit in recent years is because of low tax payments thanks to the utilisation of tax losses and a decline in working capital. Working capital decreased by $26.5 million to finish the year at $27.5 million primarily due to a fall in accrued revenue. Management has successfully reduced working capital as a percentage of revenue over a number of years freeing up tens of millions of dollars of cash.
All three reporting segments recorded revenue growth during the year. Fixed communication revenue increased 6.8% to $192.8 million, mobile communication was up 8.2% to $166.7 million and energy and water rose 6.1% to $82 million.
All divisions also reported significant EBITDA growth with fixed communications up 51.1% to $20.1 million, mobile up 21.1% to $16.1 million and energy and water up 42.9% to $5 million.
Fixed communications revenue rose on the back of an increase in work for the NBN, offset by lower billings to Telstra. NBN revenue rose $45.8 million to $184.9 million, whereas Telstra revenue declined by $33.6 million to $7.9 million.
Fixed communication revenue is likely to be higher again next year thanks to a full year contribution from two NBN contracts initiated in the second half of 2016. Similarly, a contract signed with Nokia in February 2016 worth $70 million to $90 million over a three-year period should boost revenue in the mobile communication division in 2017. Meanwhile, energy and water should deliver solid results thanks to multi-year deals with AGL Energy and Origin Energy for the installation of electricity smart meters and solar panels respectively.
Service Stream is a well-run business that looks set to continue to benefit from tailwinds in the telecommunications sector including the ongoing rollout of the NBN. However, I fear that further improvements to profit margins and working capital will be difficult to achieve and so expect cash flow to stabilise over coming years. The stock has an enterprise value-to-earnings ratio (EV/E) of 14 based on yesterday's results, which is not overly expensive for a company that has grown EBITDA for six consecutive half-years.
