Service Stream Ltd (SSM) - High-quality earnings stack

Service Stream engages in the design, construction, operation, and maintenance of infrastructure networks across the telecommunications, utilities, and transport sectors in Australia. It operates through Telecommunications, Utilities, and Transport segments. The company was incorporated in 1996 and is headquartered in Melbourne, Australia.

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Service Stream reported first-half FY26 net profit of $36.6 million, down 3% on a year ago and versus Ord Minnett expectations, while the interim dividend of 3.0cents was up 20% on a year ago and in line with our forecast. Sector P/E ratios have expanded to ~21x, underpinned by growth in median earnings before interest and tax (EBIT) of 16%. Service Stream’s EBIT growth of 10% is below this level, but we note that FY27 EBIT growth is likely to exceed the sector median. In addition, the company’s near-term growth is centred on higher-quality, repeatable operations and maintenance (O&M) activities, relative to broader sector growth in design and construct (D&C) areas that carry higher associated risk and capital requirements. In Ord Minnett’s view, Service Stream’s trading multiple of ~18x FY26 earning represents compelling relative value.  

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Utilities segment margins expanded to 5.5% in the first half, up from 4.2% a year ago, driven by a favourable rotation in the project book and contract terms. We expect this level of margin is maintainable, with top-line conditions supported by increased workflows in existing contracts and new tender opportunities.

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The long-term strategy to raise the revenue skew to O&M style contracts is now largely complete. We see returns on equity rising to 15–16% in FY27, aided by a full-year contribution of the Defence Department contract. We see free cashflows of more than $80 million in FY27 and balance-sheet capacity to support a mix of M&A, a higher dividend payout ratio and organic growth initiatives. We reiterate our Buy recommendation.

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