STR/TCI Merger Greater Than The Sum Of The PartsFN Arena News -...

STR/TCI Merger Greater Than The Sum Of The Parts
FN Arena News - September 21 2006

By Chris Shaw

Telstra (TLS) and Telecom New Zealand (TEL) are providing ongoing proof times are difficult in the telecommunications sector, but as companies continue to focus on new services such as broadband and 3G networks there remain opportunities for niche players.

That is why Intersuisse likes both Service Stream (STR) and Total Communications Infrastructure (TCI) enough to rate them as Buy, particularly as a proposed merger between the two is likely to result in increased market recognition by creating a single company with a market capitalisation of more than $200m.

The merger makes sense in the broker's view as it will allow the companies to combine their respective strengths, Service Stream being active in installation and maintenance services for Telcos on an outsourcing basis and having technical installation expertise, while Total Communications specialises in providing infrastructure for wireless operators and has good design capabilities.

This has been enough to give the two companies a high quality client list, with TCI currently installing Vodafone's 3G network and working on the Austar (AUN) and Ericsson/Telstra (TLS) networks and Service Stream having key contracts with Optus (SGT) and Vodafone.

Both companies have been listed for relatively short periods, Service Stream recently releasing its first full year profit result. Intersuisse liked it, noting revenue increased 182% to $171m, earnings before interest, tax, depreciation and amortisation rose almost 300% to $8.7m and profit increased more than 300% to $4.4m, a reflection of margin improvement over the year.

Further growth is expected in its operations as the company has both won new contracts and made some acquisitions in the past year, the broker pointing out with between 80-90% of revenues being already contracted there is little chance of any negative earnings surprise. Margins are also likely to expand further under the merged structure as the broker notes Total Communications generally has higher margin contracts.

TCI didn't post a particularly strong result in FY06, though this had previously been advised to the market and was the result of some deferrals in contracts. With this revenue to be rolled into the current year, the outlook for FY07 is for earnings to again show improvement.

Intersuisse is forecasting the merged group to post a profit in 2007 of $14.2m on revenue of around $300m, while it suggests the risk is to the upside as the combined group is expected to be active in acquisitions and bidding for new contracts while also achieving some synergy benefits from the merger.

An advantage of the merger, where Service Stream shareholders will receive two Total Communications Infrastructure (TCI) shares for every five STR shares held, is it will also remove a potential scrip overhang as the founding TCI shareholder intends to sell down his stake of around 49m shares, which represents about 45% of the company's issued capital.

Service Stream shares have traded between 21c-55c in the past 12 months, while TCI has ranged between $0.84-$1.75. Neither stock has done much today, with TCI yet to trade and a last sale price of $1.20 and STR down 0.5c at 51c. Neither stock is covered by any of the brokers in the FN Arena database.