Service Stream (SSM) is a ~$600m business that designs, constructs and maintains critical assets, mainly in the telco, utilities and transport areas. It’s been a poor performer in the Income Portfolio since it was purchased early in 2021, however there are clear signs a turnaround is underway. Following a strong 1H22 result, we had the opportunity to catch up with management last week to hear about the priorities for the business from here. They talked initially to the difficulties that COVID presented with specific emphasis on the deferral of non-essential maintenance work from their customers who were quick to cut costs, the staffing challenges COVID presented and the general hibernation Australia entered during lockdown. These headwinds have now gone and the SSM business is back operating on all cylinders. They also made a large acquisition, buying the services division of Lend Lease for $310m, almost doubling the size of their business in the process. The integration is going well and they have brought forward their expected synergies. One headwind that seems obvious is the availability and cost of labour, along with the rise in raw materials as inflation kicks. They confirmed they have rise and fall mechanisms within most contracts linked to CPI and that state borders fully re-opening is a big positive on the labour front. While earnings if FY22 will likely be flat on FY21, FY23 will see a large increase from the LLC acquisition, before normality returns, which means earnings growth somewhere around the 7-9% per annum. On a Est P/E of 16x and a near 10% yield, we like SMM around $1.
MM is considering adding to our existing position in SSM
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