Post Market Wrap | Service Stream wins 25-year rail maintenance contract for Inland Rail project

This Post Market Wrap is presented by KOSEC – Kodari Securities

• Revenue details to be confirmed at contract execution
• Strategically significant diversification into rail maintenance
• Lendlease Services integration and planned synergies progressing well
• FY22 guidance of $120- $125m EBITDA confirmed 
• Infrastructure investment in green and digital economy supports long term growth

Service Stream Limited (Service Stream or the Company) is an ASX 300 entity providing integrated end-to-end asset life-cycle services to utility, telecommunications and transport asset owners, operators and regulators across Australia. The Company specialises in the design, construction, operation, and maintenance of assets across these networks.

Service Stream employs 4500 people and has access to a pool of over 5000 specialist contractors. 

Australia’s largest freight rail project announced

Australian Rail Track Corporation has announced a consortium comprising Service Stream and others to develop 128 kms of rail track, as part of a 1700 km rail line between Brisbane and Melbourne. The $14.5 billion project, known as Inland Rail, is a once in a generation nation building project that includes a 6.2 km tunnel through the Great Dividing Range.  

Structured as a Public Private Partnership, the project includes a 25-year maintenance phase, post construction. This phase will be led by Service Stream and includes planned and preventative maintenance. It opens fresh opportunities for Service Stream by diversifying its contracted transport operations into rail maintenance. Full details of revenue to Service Stream will be confirmed at contract execution.

Solid half-year result

In the 6 months to December 2021, Service Stream grew revenue by 38 percent to $566 million, while EBITDA from Operations declined by 2.3 percent to $39.3 million. Adjusted net profit after tax (before amortisation of customer contracts and non-operational costs) was $16.3 million, down 18 percent, compared to the previous corresponding period. Adjusted earnings per share was 2.84 cents, down from 4.92 cents. An interim dividend was not declared.     

The result featured the re-basing of the Company’s legacy Telecommunications business operations as work volumes and mix changed, and the completion of the recently acquired Lendlease Services (LLS) acquisition, in November 2021. The legacy Telecommunications segment recorded a reduction in revenue due to a decrease in NBN activation and assurance volumes, in line with NBN’s strategic plan.  

The $310 million LLS acquisition diversifies Service Stream’s maintenance and asset management services across assets that include airports, roads and wind farms. Execution of planned synergies are progressing well with the 50 percent synergy run rate brought forward to 30 June 2022.

Operating cash flow of $78.9 million, up from $58.6 million, was driven by an impressive 234 percent cash conversion rate, boosted by a one-off benefit from the release in working capital built up in LLS, from new LLS contracts mobilised.  

COVID-19 impacted preventative and discretionary work volumes across utility operations and construction activities during lockdowns in Sydney and Melbourne.  

Looking Ahead 

Work in hand of $5.6 billion and net debt of $47.1 million leaves Service Stream well positioned for future growth. The Company’s long term, multi-year contracted revenues with government and private asset owners/operators, covering privileged assets providing essential services, supports dependable future cash flows.

FY22 guidance, including 8 months LLS contribution, expects pro forma EBITDA from Operations of $120 – $125 million. This includes full run rate of LLS synergies of $17 million.

The build out of Australia’s growing infrastructure needs, buoyed by public and private sector investment in the green and digital economy, means that now is an opportune time to be in the infrastructure services market.    

This Post Market Wrap is presented by Kodari Securities, written by Michael Kodari, CEO at KOSEC.