What to do with Service Stream (SSM)?

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Question asked 31/07/2021

What to do with Service Stream (SSM)?

Hi James and Harry, Actually, two questions if I can? Firstly - Service Stream. Their non-renounceable retail share offer seems to me pretty skinny: circa 3% discount on today's (Tuesday) share price. They have made a good fist of destroying a lot of value for a lot of shareholders in the last little while: can we believe that they can make the Lendlease Services acquisition work? Will MM be taking up the offer? What is MM's view on SSM acquisition of Lend Lease’s services division and its Retail Entitlement offer? Does the offer seem a reasonable or speculative investment? – Ken D Hi James, I am really disappointed in ssm share price dropping to 90 cents on asx. SSM making out they are doing retail investors a favour, whereas i am starting to believe this is a con. I believe that the purchase of Lend Leases service business was to cover up bad management. Time will tell. Can u tell me if institutional investors were done any favors over and above retail investors, like with regard to dividends. Could you please comment on the SSM 1 for 3 share offer. Is it worth participating?

Answer

Hi Everybody,

A number of questions bundled into one that relate to Service Stream (SSM) retail share offer. I have then split out the other components to your questions for those that asked them below.

SSM has clearly had a tough year, a few reasons for this. Covid has impacted their ability to work, the Telecommunication division has been weak because the NBN construction program ended last year plus NBN connections have been below expectations. Throw in some staffing issues and this has contributed to margin pressure and multiple earnings downgrades. A few thoughts about the purchase of Lend Lease’s Services Division and equity raise.

We believe the purchase makes sense, it’s a business that will fit well into the SSM stable
The price paid is reasonable. On 5x earnings they expect it will be ~30% earnings accretive in FY22
The raise was a big one. $185m of new equity at 90c per share when SSM was trading at 96c and had a market capitalisation ~$400m. i.e. a slim 6.2% discount which tells us they had a decent amount of institutional support in this deal.

The raise was structured as a placement to institutions and an entitlement offer for retail shareholders at the same price. There cannot be favourable treatment for institutions around dividends – boards must act in the interest of all shareholders. The share issue was underwritten by a broker, or in other words, the broker guarantees the funds will be raised through their clients and if not, they are on the hook. Brokers can (at their discretion) get institutions to sub underwrite the deal. For that, they would be paid a fee to do so although I don’t know if that was the case here.

The journey with SSM has not been fun for the last 18-months however MM will be taking up their rights in this instance.

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Service Stream (SSM)

LAST UPDATED 31/07/2021 08:37

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