The Service Stream Ltd (ASX: SSM) share price closed 0.5% higher on Wednesday, finishing the day at $1.955 per share. For the year, the share price is an impressive 45.9% higher.
The ASX All Ords company has enjoyed strong revenue and profit growth over the past year, improved margins and cash flow, and a strong pipeline of infrastructure work.
Investor confidence in the essential network services company has continued to climb. Macquarie Group Ltd (ASX: MQG) is also bullish on the stock. Here's what the broker has to say.
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Target price raised
In a recent note to investors, the broker confirmed its outperform rating on Service Stream shares. It also increased its 12-month target price to $2.22, up from $1.86 earlier this year. The new target price represents a potential 14.1% upside for investors from Wednesday's closing price of $1.955.
"Our TP increases +19% to $2.22ps (from $1.86ps prior), based on our 8.0x FY26E EV/ EBITDA valuation," the broker said.
The key drivers are a roll forward valuation to FY 2026, higher net cash with roll forward to FY 2026, and an increased EV/EBITDA valuation multiple to 8.0x from 7.0x prior (a 14% uplift).
"SSM and closest industry peer VNT-ASX have re-rated over the last ~12 months to consistently trade in the range of 7.0x-8.5x EV/EBITDA NTM. The rerate has been driven by SSM's execution against its organic growth strategy, increasing recognition from investors of the defensive and lower-risk nature of SSM's revenues, expected update on Defence tender award, and the potential for strategic M&A coming back on the agenda," the note said.
Macquarie added that Service Stream's balance sheet has returned to a strong net cash position, derisking the business and creating potential capital management opportunities and funding power to execute strategic M&A.
"TP +19% to $2.22ps (from $1.86ps) reflects earnings revisions, val roll fwd, and increase in valuation multiple to 8.0x NTM EV/EBITDA (7.0x prior) given strong re-rating in peer group over last 12 months," the broker said.
The telco is well-positioned for growth
Macquarie also noted that in February this year, Service Stream announced a long-term agreement with NBN worth $1.9 billion over an initial 5 years, with extension options.
The broker expects that the telco provided some favourable pricing which could be a slight headwind in FY 2026 before normalising in FY 2027-2028 due to productivity improvements.
"SSM typically delivers extra works over and above initial contract value, providing another offset to the minor margin headwind," the note said.
The company also recently announced a $440 million 3.5-year contract with NBN FTTP upgrade works and a $360 million 3.5-year contract with NBN FTTP upgrade in the ACT.
