On 6th of October 2020, the Federal Government revealed its biggest spending plan in Australian history, including $507 billion in overall support and $257 billion in direct economic support. As mentioned in last month’s GC1 NTA report, many undervalued companies are winners in this Budget which makes them good investment opportunities in these uncertain times.
One example is Service Stream (SSM), a provider of essential network services to the telecommunications and utility industries. We believe SSM will benefit from the government’s digital transformation acceleration plan.
NBN additional investment
The Budget revealed that NBN Co will invest an additional $4.5 billion to build ultra-fast broadband across the economy over the next two years. We believe SSM will likely take a material slice of that $4.5 billion investment.
SSM has been a key service provider to NBN under several previous contracts. In fact, the NBN contributed over half of SSM’s telecommunications segment revenues in FY20. A week after the Budget was announced, SSM extended its operation and maintenance master agreement with NBN. Hence we expect SSM will secure more work from NBN in the next two years.
Undervalued companies in the era of low-interest rates
In FY20, SSM paid 9 cents fully franked dividend yielding 4.2%. This is an attractive yield in the current low interest rate environment. But is the yield sustainable? We believe so.
Besides the opportunity of additional telco NBN work, SSM will receive a full year of contribution from Sydney Water work in FY21, increasing the revenue in its utility segment by $100 million.
With the overall economic outlook being extremely uncertain given the expected windback of JobKeeper over next 12 months, we believe SSM has relatively strong industry-specific prospects and reasonable valuation which is why it is one of our portfolio positions.
Till next week happy investing,
Michael & Kenny