Service Stream Limited (ASX: SSM) shares had a less than ideal run on the ASX last week, with the SSM share price sinking 20% following an announcement regarding its recent NBN agreement.
I view Service Stream as a fairly high-quality company and shares are looking cheap, at least relative to where they were previously. So are shares a buy today?
What does Service Stream do?
Service Stream provides essential network services to the telecommunications, energy and water industries.
Service Stream can be viewed as a beneficiary of private and public infrastructure spending. Earlier this year, the Federal Government announced it would be spending billions of dollars improving the NBN.
The company’s share price was rallying around this time and there was definitely some optimism embedded into the share price in the hope that the company could significantly benefit from the government spending.
Service Stream’s most recent announcement last week confirmed that it had secured a long-term agreement with NBN Co for the provision of service activations, operations and maintenance services.
The share price actually fell off the back of this announcement because it revealed Service Stream will only be used across Queensland, South Australia, Northern Territory and Western Australia, with no mention of Victoria and New South Wales.
New South Wales and Victoria are our most populated states, so these two definitely represent a significant amount of revenue that Service Stream will not be receiving.
Buy/hold/sell?
I don’t think I’d be a buyer of Service Stream shares today, but I also wouldn’t be in a rush to sell either as I think Service Stream still has some quality aspects I’d look for in an investment.
Service Stream has a significant number of blue-chip customers meaning revenue should be fairly reliable and often on a recurring basis. Revenue and net profit has steadily grown over the last 5 years while return on equity (ROE) has usually been between 15-20%. However, margins from services businesses aren’t often extremely high compared to others and Service Stream often achieves a gross and net profit margin of 40% and 5%, respectively.
My decision to invest in a company like Service Stream would ultimately depend on the underlying state of the economy and trying to identify an event that will act as a catalyst that Service Stream can use to its advantage.
Given the latest announcement, it seems like there might not be too many catalysts on the horizon, at least in the short term. For this reason, I’m holding off on buying Service Stream shares for the time being.
For more share ideas, click here to read: 3 ASX shares to add to your 2021 watchlist.
