Service Stream (ASX:SSM) share price slides despite 34% profit growth in FY21

Service Stream shares are down as the telco services company announces no final FY21 dividend.

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The Service Stream Ltd (ASX: SSM) share price sunk into the red during Thursday afternoon trade as the telecommunications company reported its FY21 earnings.

Service Stream shares closed the day at 86 cents a piece, a 2.82% drop on the day.

Let’s investigate a little further.

Service Stream share price sinks despite strong profit and earnings growth

  • Revenue of $804.2 million, a 13.4% increase from the year prior
  • EBITDA growth of 25.9% year on year to $80.1 million
  • Adjusted net profit after tax (NPAT) of $38.9 million, which signifies a 33.8% growth from a year ago
  • Net cash recorded a loss of $3.9 million compared to FY20
  • FY21 interim dividend of 2.5 cents per share, no final dividend announced.

What happened in FY21 for Service Stream?

In what should potentially be a positive for the Service Stream share price, the company grew revenue by about 13% year on year to $804.2 million.

It also recognised a 26% growth in EBITDA to $80 million, which came through to an NPAT of around $39 million. This represents a 34% year on year growth pattern.

In terms of its divisions, Service Stream’s utilities segment grew revenue by $27.5 million to just over $411.5 million. This was split between Comdain infrastructure revenue of $320 million and metering and technical services revenue of $92 million. COVID-19 had a material impact on its utilities division, as per the company’s report.

However, in its telecommunications division, revenue contracted by $152 million, a 28% year on year decrease. The down-step resulted from a decrease in both activation and wireless revenue, down 30% and 14% respectively from FY20.

Service Stream also generated about $74 million in “operating cash flow before interest and tax (OCFBIT)”. This represents an “outstanding EBITDA to OCFBIT conversion ratio of 99%”, according to the company.

The telco company left FY21 with $50.6 million in cash and $35 million of debt. Finally, the board declared that there would be no final dividend for FY21. This point could weigh on the Service Stream share price.

The decision is due to the Lendlease Services acquisition from 21 July to “ensure the group maintains a strong balance sheet”.

What did management say?

Service Stream chair Brett Gallagher said:

Although earnings related to the Group’s telecommunication division reduced during the year, the fundamentals of Service Stream remained strong, reinforcing the resilience of our business model and the nature of the Group’s operations supporting essential infrastructure across the country.

Regarding Lendlease, Gallagher concluded:

The Board is also pleased that despite a challenging year, Management has maintained its focus on executing the Group’s Strategy, and is delighted with the acquisition of Lendlease Services which will create a broader portfolio of operations across the wider infrastructure services market.

What’s next for Service Stream?

Service Stream expects “post-acquisition pro forma FY22 EBITDA” to be in the range of $120 million -$125 million.

The company’s “standalone earnings” are expected to “rebase below FY21”. This would be in line with the “telecommunication contracts secured in FY21”.

Moreover, it expects lockdowns “should diminish as vaccination rates increase”. However, it remains cautious on making forecasts with the current state of the economy affected by COVID-19.

The Service Stream share price has had a difficult year to date, posting a loss of 51% since January 1. This has lagged the S&P/ASX 200 index (ASX: XJO)’s climb of 14% this year to date.

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