Why Service Stream (ASX: SSM) Shares Look Risky

On the face of it, Service Stream (ASX: SSM) stock looks very risky, and it would be too risky for me, due to a large numbers of risk factors.

First of all, in H1 FY 2023 Service Stream recorded a statutory net loss of $6.3m, down $11.6m compared to first half FY22 (which was a profit). This was “primarily due to the additional $20 million onerous contract provision recognised in respect of the Queensland Utility project.”

More recently, I notice this publication by ASIC, which says “An application for the winding up of SERVICE STREAM HOLDINGS PTY LTD was commenced by the plaintiff Commissioner of State Revenue on 20/04/2023 and will be heard as set out below.”

The Service Stream FY 2022 Annual Report lists Service Stream Holdings Pty Ltd as a wholly-owned subsidiary and says in a note that “These wholly-owned subsidiaries have entered into a deed of cross guarantee with Service Stream Limited pursuant to ASIC Corporations (wholly-owned companies) Instrument 2016/785 (Instrument) and are relieved of the requirement to prepare and lodge an audited financial and Directors’ report.”

Now, I don’t know what it means to Service Stream Ltd (the listed company) that Service Stream Holdings Pty Ltd is facing an application to be wound up.

But I do note that plenty of Service Stream’s revenue came from NBN contracts, and presumably as that project matures, the amount of incremental work will fall.

Bizarrely, after the Service Stream half year results, the company chose to pay a 0.5c per share dividend, despite the fact the Service Stream had over $90m in net debt at June 30, and produced negative free cash flow, after accounting for lease repayments.

If I was a shareholder of Service Stream I would ask why the Commissioner of State Revenue has applied to wind up Service Stream Holdings Pty Ltd. While this may not mean much, it simply joins a bunch of other negatives such as significant debt, declining earnings, and negative free cash flow.

Surprisingly, we have seen directors buy shares on-market, recently.

While a rebound in profits could make Service Stream look cheap, that is far from guaranteed and so Service Stream stock looks very risky to me!

I have just asked Service Stream for comment regarding the application to wind up Service Stream Pty Ltd, and will post any response below.

Although I never received a response to my query I subsequently have received word that “the matter was an unfortunate administration issue which both Service Stream and the State Revenue Office (SRO) quickly resolved. The SRO’s Application has been formally withdrawn and the matter has been concluded.”

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Disclosure: the author of this article does not own shares in SSM and will not trade in SSM shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).