The Motley Fool

Why this ASX infrastructure company could help protect your portfolio in a downturn

Shares in ASX essential network services business Service Stream Limited (ASX: SSM) look set to end the week down more than 6% despite the company’s attempts to reassure the market that it hasn’t been experiencing any overly negative financial impacts from COVID-19.

Service Stream designs, constructs, operates and maintains essential telecommunications and utilities infrastructure, including water and gas distribution networks. With large portions of the Australian population still more or less confined to their homes, people are relying on this infrastructure now more than ever.

In a business update released to the market on Thursday, Service Stream stated that demand for its services had remained strong throughout the pandemic. However, it did note that the costs of delivering those services had increased, and some “minor” projects had been delayed or paused.

Service Stream had originally forecast operational earnings before interest, tax, depreciation and amortisation expenses (EBITDA) for the second half of FY20 to be in line with the first half result of $58.1 million. Due to the impacts of the coronavirus pandemic, the company now expects full year operational EBITDA to be $108 million, which would imply a second half operational EBITDA in the range of $49.9 million, or a decline of a little over 7% versus the first half.

The market reacted negatively to the news, with the Service Stream share price dropping almost 6% on Thursday. However, while it’s disappointing that the company is now forecasting a drop in EBITDA, Service Stream does point out that operational EBITDA of $108 million for the year would still be a record result for a growing company.

Should you invest?

Service Stream doesn’t provide the exciting growth narratives of coronavirus market darlings like Kogan.com Ltd (AS:KGN), Appen Limited (ASX:APX) or NextDC Limited (ASX:NXT). But the fact that it is flying under the radar for many investors works in its favour.

Shares in many of those sexier tech companies are now trading higher than they were pre-coronavirus, which seems unsustainable as the country heads into a potential economic recession. For example, despite its soaring share price, Kogan relies on strong consumer sentiment, which may not exist once the economic impacts of the coronavirus pandemic are fully realised.

Service Stream, on the other hand, should have a much more reliable source of revenue. Even in periods of economic stress and uncertainty, people will continue to depend on the infrastructure that supports necessities like water, gas and telecommunications.

Service Stream could make a good defensive option for investors looking to safeguard their portfolio against a severe downturn. Plus, at its current price of around $2.00 it is still well short of the 52-week high price of $3.06 it reached back in August – meaning it could represent great value.

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Motley Fool contributor Rhys Brock owns shares of Kogan.com ltd. The Motley Fool Australia owns shares of and has recommended Kogan.com ltd. The Motley Fool Australia owns shares of Appen Ltd. The Motley Fool Australia has recommended Service Stream Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.