underpriced service company

I will soon be coming into some more funds, so have started casting my net wide. And BSA came up.

WHAT ATTRACTED ME TO BSA:

- The large value gap between the price and the intrinsic value
- P/E of 5, dividend yield of 10 (unusual for a company of this size - mcap only $44m).
- Predictable and stable earnings (unusual for a company of BSA's size - most tend to be 'lumpy' and non-recurring)
- Growing revenue, with exposure to the Resource Market in WA
- Long term annuity type contracts with Tier 1 companies
- Share price is artificially low, only due to the selling down of one holder. This will be finite.
- reasonable liquidity for moderate sized investments.
- modest gearing, with long term borrowings.
- Solid Forward Book, with long-term contracts.
- Recent investments in acquisitions to boost revenues in higher margin areas and regions.

Core business is in HVAC building services and construction, servicing HVAC, and Contracting Services (such as Foxtel insallations and NBN fibre).

SOME RISK FACTORS TO CONSIDER:

- Margins are relatively low - EBITDA of $16.3m on revenues of $403m. So financial discipline on costs and contracts is essential. (But has been demonstrated over many years)
- One of the business units is in the Contracting Services, largely servicing Foxtel. Foxtel installations have been in gradual decline, impacting revenues. This accounts for 33% of BSA's revenue last FY, and the decline has been around 10%. Foxtel have just renewed 4+1 year contract with BSA. On the plus side, there may be a reversal of this trend via Foxtel's landmark deal with the AFL, boosting new installations. Foxtel installations may also benefit from 'cocooning' during times of restrained consumer spending. Also a Foxtel/Austar merger would add to potential installations.

SHARE PRICE CATALYSTS:

- End of Link Enterprises selling down removes downward pressure on sp.
- Expected 20% growth in revenue in FY12.
- If BSA's share price gets rerated from its current p/e of 5 to a modest 8, this is still a ROI of 56% from current prices.
- Further contracts secured.
- Additional revenue from the new acquisition in WA (Burke Air), which services the mining boom in regional WA.
- Last FY, there were some non-recurring capex associated with moving operations to Sydney's Olympic park. The absence of these one-offs should boost the bottom line in this FY.

SUMMARY - I doubt BSA will be a share to set the world on fire. If you are looking for a 'multi-bagger' in a short time frame, BSA is not for you. However, if a low p/e, high dividend yield, predictable earnings and revenue growth are what you look for, BSA looks to be a very underpriced company at the smaller end of the spectrum. A 30-50% gain in share price in the next 12 months looks quite achievable, with minimal downside at current prices.

Yaq