I think you'll find that Allan Gray is not a 'he', but an 'it' -...

I think you'll find that Allan Gray is not a 'he', but an 'it' - an asset management firm that runs a number of actively managed funds, supposedly with a contrarian bias. Irrespective, it's really pleasing to see an active manager as a major shareholder that will (hopefully) engage with the board on capital allocation and other important matters, as opposed to an index shop like Black Rock or Vanguard, which ordinarily restrict their engagement with boards to ESG-related matters.

SSM appears to be priced - by three covering analysts - to deliver mediocre earnings off margins that are far thinner than they were before the Lend Lease Services acquisition. So if the company can do slightly better than '’mediocre'’ and restore EBITDA margins to a point that is even somewhat close to the 10-11% pre-acquisition level (vs. the FY22 and FY23-24 consensus-projected 5-6%), the potential upside to profits - and, by extension, the share price - is really quite substantial. It won't be an easy gig in this inflationary climate, but CEO Leigh MacKender on earnings calls etc. has repeatedly indicated that SSM is well-equipped to manage inflationary pressures via annual price reviews (which are applicable to 87% of revenue) and various other measures. Further, SSM generate 80% of their revenue from the public sector, so they're arguably better placed than most to weather a general economic slowdown.

There are risks to the downside, to be sure, including but not limited to cost blowouts on specific projects and labour shortages that might prevent the timely completion of work. Also, the balance sheet remains somewhat weighed down by debt (at June 2022 net debt was $138mn ), with intangibles accounting for a large chunk of assets, not ideal for a contractor.

Note, too, that the board members have form when it comes to selling down the shares they own when the share price becomes elevated. Directors can sell shares for any no. of reasons, of course, but in the case of SSM it might be prudent to simply follow the money and exit the stock in the event that one or more directors sell down a material part of their holding.

Net, net, market expectations appear to be low and, at the current 72c share price, holders should pull a 4-5% dividend yield (fully franked) as compensation for waiting for things to work out.

Allan Gray will see all of this, and more.