Why the Service Stream (ASX:SSM) share price could come under pressure on Thursday

The Service Stream Limited (ASX:SSM) share price could come under pressure on Thursday following the release of its disappointing half year results…

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Service Stream Limited (ASX: SSM) shares could come under pressure on Thursday. 

This afternoon the essential network services company released its half-year results after the market close. The Service Stream share price closed Thursday’s session flat at $1.71.

What could impact the Service Stream share price?

The Service Stream share price will be on watch tomorrow after the company reported a difficult six months which was reflected in its results for the first half of FY 2021.

On the top line, the company posted a 17.7% reduction in revenue to $409.9 million.

This was driven by a small increase in Utilities revenue to $199.6 million and a 30% decline in Telecommunications revenue to $209.9 million. The latter was due to the conclusion of the NBN construction program last year and lower activation volumes. Wireless revenue also continued to track below expectations due to the slow ramp up of 5G expenditure.

This ultimately led to a 40.5% decline in first half net profit after tax to $16.2 million.

Positively, the company reported a strong cash flow result for the half year. It notes that its EBITDA to OCFBIT conversion ratio came in at 108%. This left it with a closing net cash balance of $10.5 million. This comprises cash-on-hand of $50.5 million and borrowings of $40 million.

However, in light of its profit decline, the Service Stream Board was forced to cut its interim dividend. It has reduced it by 37.5% to a fully franked 2.5 cents. This will be payable to eligible shareholders on 14 April.

Outlook

Management has warned that the second half could be just as tough as the first. It expects COVID-19 related and client-initiated delays to work programs and shortages across client supplied materials, coupled with restrictions on movement and interstate travel bans, to continue for the reminder for the year.

In light of this, the higher contribution management had expected in the second half is unlikely to materialise. As such, it advised that it now expects the second-half result to be approximately in-line with the first half.

Management is, however, more positive on its long term prospects. It concluded:

“Whilst these results are subdued, the business continues to demonstrate strong fundamentals and has benefitted from our strategy to progressively diversify across critical utility infrastructure markets and to expand our service offerings.”

“These markets are well understood by Service Stream, and hold positive long-term outlooks associated with increased urbanisation and consistent expenditure associated with maintaining and upgrading critical infrastructure.”

“The business has a strong pipeline of organic growth opportunities linked to our core markets, and will continue to adopt a measured approach to assessing potential external growth opportunities, ensuring they will enhance the Group’s long-term performance.”

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia has recommended Service Stream Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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