Service Stream Limited (SSM) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to the Service Stream Limited full year results. [Operator Instructions] I'd now like to hand the conference over to your first speaker today, CEO, Leigh MacKender. Thank you. Please go ahead.

Thank you very much. Good morning, ladies and gentlemen, and welcome to Service Stream's full year results presentation for the 2020 financial year. My name's Leigh MacKender, I'm Managing Director of Service Stream, and I'm joined today by our Chief Financial Officer, Linda Kow. I'd like to formally welcome Linda to her first reporting season as the company's CFO. We're recording the session today via webcast. It's open to all registered Service Stream shareholders, and we have a number of institutional investors and analysts on the conference bridge, who are more welcome to ask questions at the conclusion of the presentation. Today, we'll run through a very brief overview of the company profile. We'll work through the performance highlights throughout the year, focusing on some detail in relation to the business' response to and the impact of COVID-19, moving into the group's financial and operational performance. And then finally, we'll touch on the outlook and priorities. And at the end of the presentation, we'd be happy to take questions from those joining us on the conference bridge. Expect this session to last to be 30 to 45 minutes including time for questions. Just before I go forward some initial comments, I'd like to take a moment just to recognize and thank Bob Grant, who leaves the business this month after 8 years as the company's CFO. As many will know, Bob announced his retirement last year, and the business has been very fortunate to have Bob over this time and which has contributed significantly to the business' success. On behalf of the Board, executive management team and all of Service Stream, we thank Bob. Now moving to the company profile to Slide 2. Service Stream is an essential network service provider. Our core markets are focused on utility and telecommunications, where the business provides end-to-end services associated with the design and construction and operations and maintenance of the essential infrastructure networks. Business has a strong client base, consisting of Australia's leading blue-chip industrial asset owners, operators as well as government and government-related organizations. Business has 2 reporting segments being telecommunications and utilities. The Telco segment providing integrated design, construction, engineering and operations and maintenance services across fixed-line and wireless network infrastructure. Key clients in that space include nbn, Telstra, Optus, New South Wales Telco and others. And then we have the company's utility division that provides a unique set of end-to-end services associated with the design, construction, asset installation, inspection and operations and maintenance of utility infrastructure. And key clients in this space are gas, water, electricity, asset owners, operators, retail service providers and local government authorities. Moving on to Slide 3, we'll just touch on some of the key performance highlights over the period in relation to financial, operational and strategic performance. Touching first on financial performance. The business has reported another solid period of growth. We recorded EBITDA from operations of $108 million, that reflects 16% up on the prior year. We saw improved group EBITDA margins. And after a period of strong cash flow generation, the business moved back to a net profit position, with a well-positioned balance sheet to able to assist in providing support for future growth opportunities. On the back of these results, the Board was pleased to announce a final dividend, taking full year dividend to $0.09 per share fully franked, and that's consistent with FY '19. If you look at our operational highlights and noting I have further insight as we delve into each of the 2 reporting segments in great detail later in the presentation. But at a high level, business is really proud, firstly, of our leading safety performance with further improvement being achieved across our key performance indicators over the prior 12 months. Our joint venture successfully mobilized our new long-term agreement with Sydney Water, which was announced in half 1, and operations to support the infrastructure upgrade of Queensland Urban Utilities [ garden ] network are also performing well. We're currently negotiating with nbn on an extension to our current operations and maintenance master agreement, referenced as the OMMA agreement there, and that covers service activation, connection and assurance works post its expiry currently scheduled for December '20. And finally, the business successfully demobilized our nbn construction programs during half 2 with the completion of the nbn build. Just touching brief on some strategic highlights. The retention of core agreements is critical to the group as it looks to secure new growth opportunities. Really pleased to see that over the FY '20 period, the business secured in excess of $200 million in annual utility contracted revenues. Business has also been successful in our efforts to expand Comdain's operations across western states of the country, with new operations due to commence in WA over the coming months. This is one of the key areas of growth for the business that we announced upon Comdain's acquisition 18 months ago. More broadly, we continue to see really strong demand across each of our core markets, driven by dependence on critical network infrastructure and a need by many of our clients to update and replace aging infrastructure assets. And finally, the business continues to identify and assess a number of M&A opportunities, which will further support our growth and diversification, and we're targeting known and familiar markets across that space. Moving into Slide 4 in total group strategy, and I'll briefly provide an update and insight into how the group's growth and diversification strategy has been progressing over the prior 12 months. Service Stream's strategy has been focused firmly on achieving consistent and sustainable growth, whilst looking to diversify revenues across those known and familiar markets. The graphs on this slide provide a view and insight to the group's revenue growth over recent years and how the business has progressively diversified revenue from what was previously a largely telco-focused service provider to what is now a broad and multifaceted essential network service provider, expanding our capabilities and service offerings wider and deeper across utility markets. We've provided some additional insight to the revenue breakdown or contract mix held across the group, and these broadly fall into 3 categories: The first is operations and maintenance, that being annuity-style revenues that provide under multiyear stable contracts, and that represents really the core of our business. We then have 2 forms of design and construction works, the first being panel agreements. These are long-term low-risk agreements with our clients where Service Stream is contracted alongside a peer group, and work is often allocated or shared amongst the panel members. And then finally, we have traditional design and construction or individual bid and win projects, which makes up 16% of that work. So as you can see, the revenue portion under each is outlined below with the business holding circa 84% of our work in FY '20 across those long-term operations and maintenance contracts or low-risk design and construction panel agreements. The average contract term across the business is about 3 to 5 years; however, many of our agreements in the utility operations are starting to stretch out longer. Average tenure for the business, however, is much longer, with many of the group's utility agreements now stretching into mid-20th or late-20th year of renewal. And many of the telecommunications agreements will also be approaching well into the double digits. As I mentioned earlier, the business has an expansive client base. They represent the country's leading blue-chip industrials, government and government-related organizations, and we've provided a breakdown of revenue by industry type. We certainly see a positive mix in relation to the markets or industries we're serving across that client base. Looking on to Slide 5 and it provides a brief update in relation to COVID-19 and the impact that this has had across the business. The group's exposure to essential infrastructure markets has certainly limited the impact that COVID-19 has had across the business. In the main, our contracted revenue base has not been dramatically impacted, with the majority of our services continuing to be provided, and that's understandable given the role that Service Stream plays in supporting infrastructure. We often represent a major component of our clients' field workforce. As I mentioned in my opening comments, the group's balance sheet, cash flow and liquidity remain strong, and have further improved over the period, and Linda will talk more to these later in the presentation. And whilst we have seen some impact in half 2, the business does not need to access any government support programs in the form of JobKeeper or any other of the packages. The impacts of COVID have been limited to increased costs associated with safely supporting our operations, such as additional cleaning regimes across depots and offices, the running of double or staggered shifts and higher levels of personal protective equipment needing to be deployed. Our utility operations were impacted through a moratorium on gas and electricity disconnections and the subsequent reconnections, which still exist today across many states, but we are starting to see green shoots in terms of that easing with planned recommencement of those services hopefully to take place over the coming months. The minor areas of the group's utility operations is associated with installing new estate infrastructure, and we've seen lower levels of activity in this area of the business. We have incurred client initiated delays to proactive maintenance programs across both of our utility and telecommunications operations. And finally, some delays in the award of or commencement of new projects by clients, again, across each division. And this is generally associated to factors such as minor material shortages in client supply material and equipment, travel [Technical Difficulty] borders is being enforced across state lines and restrictions across entering or accessing some remote and regional work locations. I'll now hand across to Linda to provide some insight into the financial performance.

Thanks, Leigh, and good morning to everyone. Before we delve into the numbers, I'd like to note that FY '20 is the first year the group has adopted the new AASB 16 leases accounting standard. As submitted by the transitional provisions of the standard, we have not retrospectively restated our prior year financials. The year-on-year impact is an increase in EBITDA of $10.3 million, which is offset by increases in depreciation and interest expense such that the net impact is a small reduction to NPAT of $0.1 million. Revenue for the year was $929 million, which is 9% up on last year and a record for the group. Revenue was weighted $544 million, which is 59% to telco and $384 million or 41% to utilities. EBITDA from operations was $108.1 million, up 15.9% on last year and also a record earnings outcome. This is in line with the business update we provided earlier in May and excludes $2.5 million of nonoperational costs associated with the assessment of M&A opportunities and the integration of Comdain infrastructure. EBITDA margin was 11.4%, which is an increase of 0.9%. This reflects a mix of margin improvement across telco, increased Comdain weighting off to the group and an uplift from the adoption of the new lease accounting standard. In terms of cash and cash flow management, net cash at year-end was $19.5 million. This was a very pleasing outcome with strong cash flow conversion of 108% in the second half, lifting the full year OCFBIT cash conversion rate to 82%. As a result of the positive earnings and cash flow performance for the year, the Board has declared a final dividend of $0.05 per share, taking the full year dividend to $0.09 per share fully franked which is in line with the FY '19 full year dividend. This represents a payout ratio of 74.2% on reported net profit after tax. Slide 8 sets out the group's key financial measures. I've already spoken to many of the financial metrics outlined here but will touch on a couple of other items. Adjusted NPAT, or NPATA, for the year was $58.8 million, which is 1.9% above last year. In addition to the nonoperating costs which we exclude from operating EBITDA, we also exclude the amortization of acquired customer contracts from this metric to provide a view of underlying business performance. Adjusted earnings per share was $0.145, which was slightly lower than last year and primarily due to the weighted average impact of shares issued mid last year to fund the Comdain transaction. Before leaving this slide, you can refer to Appendix 2 of the results presentation for a reconciliation of the adjusted profitability measures back to their statutory or IFRS equivalent. Now moving on to Slide 9 which is segment results. Telecommunications revenue for the year was $544 million, which was $45.2 million or 7.7% lower than last year. The conclusion of nbn design and construct activities following the successful completion of the program during the second half, resulted in an $89 million reduction in revenue. This was partially offset by an increase in revenue associated with nbn activation and maintenance volumes despite COVID reducing some operations and maintenance activities. Wireless revenues was also lower than last year, this was due to the slow ramp of the 5G expenditure by mobile carriers and COVID impact also delaying the commencement of some project works. Telecommunications EBITDA was $83.1 million, an increase of 7.8% against prior year. The increase in EBITDA was aided by the adoption of AASB 16, the profitable wind up of nbn D&C operations and favorable operations and maintenance work mix. If we move on to Utilities, revenue for the full year was up $120 million primarily due to a full year contribution from Comdain. Metering Services revenue was largely flat against last year, which was a good outcome, taking into account COVID-related reduced activity due to the moratorium on electrical and gas disconnections that Leigh touched on previously and also reduced residential land activity. Revenue from new energy was also lower due to fluctuating volumes across commercial solar and battery storage programs. Utilities EBITDA of $30.8 million, an increase of 36.7% against prior year, also reflective of a full year contribution from Comdain. If we look at the pie chart on the right-hand side of the slide, we see a progressive shift in segment revenue and EBITDA contribution from Telecommunications to Utilities in line with the group's diversification objectives. Utilities now account for 41% of group revenue, which is up 10% from the prior year. EBITDA contribution from Utilities has also increased to 20% of group EBITDA from 23% last year. Below EBITDA, you will note we've separated out the additional depreciation and interest expense arising from the new lease accounting standard of $9.5 million and $0.9 million, respectively. The balance of the increase in depreciation and interest expense is largely due to the full year impact of Comdain and the additional banking facilities established to fund acquisitions last year. Tax expense for the year was $25.2 million at an effective tax rate of 30%. Adding that all up, adjusted NPAT was $58.8 million, which was $1.1 million or 1.9% above last year. And finally, we have a little table at the bottom right-hand side of the slide that summarizes the P&L impact from the lease accounting standard for your reference. Now on to cash flow results on Slide 10. The group had another strong cash flow outcome for the year with a full year OCFBIT conversion rate of 81.9%, making it the sixth consecutive year we have achieved a profit and cash conversion rate in excess of 80%. The second half OCFBIT conversion was 108%. In achieving this result, the business has not adopted factoring across any of our working capital and our subcontractors and suppliers have been paid as at 1 June. Due to uncertainty at the time, we did see and received some minor rent and tax payment deferrals at the onset of COVID. Some of the concessions have already been repaid by 30th of June, and the balance will be repaid in coming months. Operating cash flow for the year was $57.7 million, $1.8 million below pcp. Interest payments increased by $2.2 million due to the increased debt facilities and debt drawn to fund the Comdain acquisition. Tax paid was $6.4 million higher than last year, with the increase due to payment of the Comdain subperiod tax return and a true-up of FY '19 income tax return against installments paid. This is net of a $5 million COVID-related income tax installment deferral which will be repaid this quarter. Capital expenditure for the year was $6.5 million which was lower-than-planned with the Comdain IFS ERP implementation pause due to COVID. This project is currently restarted and planned for completion during FY '21. The cash flow has a new line of $9.7 million for lease payments, which now reported outside of cash flow from operations following the adoption of AASB 16. The other item of note in the cash flow is $4.2 million of lease incentives received in relation to the renewal of our corporate offices in Melbourne. All up, there was a net increase in cash over the period of $11.6 million, which is a nice segue to capital management on Slide 11. As noted earlier, the group ended the year with a net cash position of $19.5 million, with a strong balance sheet and liquidity position, which provides support for both payment of dividends and for ongoing investment in growth and strategic expansion. Working capital remained at a highly efficient level of less than 1.5% of annualized revenue enabling strong EBITDA to cash flow conversion. With this, the Board has declared a final dividend of $0.05 per share, maintaining the full year dividend of $0.09 per share in line of last year. The final dividend will be paid on the 1st of October, and the DRP will continue to apply. And finally, we are currently in the process of refinancing our banking facilities which expire September 2021, with a targeted completion during quarter 2 of this financial year. Well, that's all from me. So now I'll hand you back to Leigh to take you through the remainder of the presentation pack.

Thank you, Linda. Appreciate it. I'll now move to the operational performance of the group, working through both of the segments. But firstly, I'll just touch on the group's safety performance and direct you to Slide 13. First up, my earlier comments, Service Stream is very proud of the strong safety culture and the industry-leading performance, which is delivered by the organization. Our HS&E performance remains the #1 priority for the business, and we're committed to ensuring the safety of people, customers and the community with whom we engage with is always front of mind. As you can see from the performance graphs outlined at the bottom of the page, our total recordable injury rate decreased over the period, reaching a new all-time low of 2.07; medically treated injuries were largely steady with the prior year's position, finishing at 1.73; and finally, lost time injury rates reached an improved position of 0.35 for FY '20. Ultimately, very proud of the group's safety performance, and the business continues to work on targeting high-risk work activities and identifying further opportunities to improve the safety of our operations. I'll now move through each of our main segments, provide some operational commentary and direct you to Slide 15, the telecommunications division. As Linda covered earlier, division generated $544 million in revenue and $83.1 million of EBITDA during FY '20. Revenue associated with fixed-line connections and maintenance programs increased over the period, despite COVID-19 causing some maintenance-related works in the second half to be delayed. Linda also explained that whilst revenues continue to be lower than the business has seen historically, but they were in line with our prior comments and expectations. And that's due to that slow ramp-up of 5G-related infrastructure by mobile carriers, and also some COVID impact to this area to a small degree associated with border restrictions, availability of client supply materials and a decision not to progress works across some remote indigenous communities. Business delivered a strong EBITDA margin of 15.3%, reflecting the improvement over the prior period. And as Linda outlined, that was -- that benefit was derived from a favorable work mix, successful wind up of our D&C operations at nbn and the adoption of the new leasing standards. If you look at the breakdown of our telecommunications revenue as per the graph on the bottom of the page there for FY '20, we can see that 71% is associated with those low-risk, stable operations and maintenance agreements; 29% represent the remaining portion associated with design and construction agreements where Service Stream are a panel member alongside peer organizations; and less than 1% of our telecommunications revenue is associated with individual win and bid -- sorry, bid and win projects. So despite not having guaranteed volume commitments under the group's agreements, which is understandable given the nature of our reactive works, the contract profile does provide a position of strength. So moving on to Slide 16 and touching briefly on some of the operational highlights. The business is currently in the latter stages of negotiating extension to our operations and maintenance master agreement, our OMMA agreement with nbn. That's currently due to expire in December this year. The business successfully reached conclusion of all nbn-related programs as I said earlier, and it's pleasing to say that they're all wrapped up successfully and decommissioned well during the second half. Ultimately, very pleased with the performance across the telecommunications operations, and whilst we are proceeding through a transition period with regards to the deployment of 5G infrastructure, business is delivering and our relationships with clients remain solid. Now moving on to the utilities division, I'll direct you to Slide 18. I'll first just touch on some high-level commentary as it relates to the financial performance, although I note Linda has gone into in greater detail. You can see the headline numbers there, revenue, $384 million in the period, $30.8 million in EBITDA was delivered -- resulting in an EBITDA margin of 8.3%. Very pleased with the EBITDA margin in this area of the business. When we look at industry averages, this is reflective of our work mix and the low-risk nature of these operations. Metering operations are largely flat as were expected. And I think that's reflective of the mature market. We have strong market share over 50%, but it is a mature market. New energy operations associated with solar and battery storage installations were lower. This is impacted by a few areas. Battery and solar is a discretionary purchase item, therefore, demand will fluctuate. It is reflective of COVID hampering some business investment into commercial rooftop solar operations, and restrictions paring back some installations. And the business continues to be very selective about which customers we'll conduct work with and the type of work that we'll undertake in this area. We have included the same revenue breakdown for this area of the business as I ran through in the Telecommunications to provide insight into the mix of works. And for FY '20, you can see that 54% of our revenue is associated with long-term stable operations and maintenance contract agreements that provides that strong and stable base. 9% is associated with low-risk design and construction panel agreements where Service Stream are a member alongside peer organizations, and 37% is associated with individual bid and win projects, largely across the Comdain Infrastructure group. Just touching on Slide 19 now, and some operational highlights across the utilities division. Business has certainly seeing continued demand for utility-related work during the year despite COVID restrictions and associated client-initiated delays impacting the second half of the year. Business is able to secure as per my initial comments and/or renewed in excess of $200 million annual contracted revenues over FY '20, providing a very stable base for the years ahead. When the acquisition of Comdain was announced 18 months ago, we outlined that we would look to progressively expand the business' operations from the eastern states across to the western states of Australia being WA and SA, where our traditional utility businesses have always had a solid base of operations. I'm very pleased that the business has been successful in this area over the year with works due to commence in WA shortly, and provides a lot of future potential and opens up a new geography and area for the business to expand into. Our D4C joint venture agreement for Sydney Water, in which we partner with Lend Lease, John Holland and WSP Australia has successfully mobilized, and those operations commenced on 1 July without issue. And over the last 12 months, the business has established a common leadership team across our utility operations, again, in line with our plans for the Comdain integration. And that was to ensure we're driving opportunities across our client base, providing expanded set of services for our customers and the business is not siloed. This period marks the conclusion of the Comdain integration program, which I think has gone incredibly well. Overall, very pleased with the performance of our utility division over the FY '20 period. And finally, I'll just direct you to the group outlook on Slide 21. So Service Stream remains well positioned, and we expect to see continued demand for our services, as Linda and I had spoken to. The business is supported by long-term contract base, which supports critical infrastructure networks, and we expect earnings to remain resilient. This will be dependent on the continued workflow from our clients across our existing contracts, no further client-initiated delays to planned program of works and the resumption of programs that have been previously delayed by clients due to the recent COVID restrictions. As Linda outlined, the group's balance sheet and cash flow remained strong with access to ample liquidity. I've outlined some of our priorities at the bottom section of this slide here, the first being to resecure our NMRA, or our network maintenance remediation agreement with nbn. Moving forward to be known as Unified Networks and is associated with supporting the provision of 24/7 maintenance services and proactive upgrades. Our current agreement doesn't expire till June 2021, but this is the only material contract across the business to come out to market over the next 12 months. Securing organic growth opportunities across utility operations and further bolstering Comdain's geographic presence in WA, SA and Queensland is our second priority. And as Linda outlined, we are going to recommence the implementation of the group's ERP system across Comdain, and that will provide that stable base at which we continue to grow on. And finally, we'll continue to assess external growth opportunities, which will support further growth and continued diversification across the group. That concludes the presentation of our results. I'll hand back to the moderator. And Linda and I will be happy to take questions from those joining on the bridge.

[Operator Instructions]Our first question comes from Matt Johnston from Macquarie.

Can you hear me?

We can, Matt.

Just a quick first one. Just on the shortages in the materials, is that an ongoing issue? And has that got better since, I guess, the March, April first wave period?

Yes. It has got better. There's still some issues. This is client-supplied material. We obviously don't have a lot of material that we supply for our works. It has improved, Matt, but it's still not 100% complete and sold for. So I expect to see that continuing to improve over the remaining half year.

Okay. Great. And then just onto the Comdain revenues. If you look at the half-on-half profile, you can clearly see the reduction there. Can you maybe give a bit more detail in terms of what's driving that? Is it similar to what the same issues that was happening in the first half?

No, I think the outline that we've provided in relation to the second half on the revenue line is really primarily associated with some of the COVID-related pauses across some programs of work that we'd hoped to commence over that period. When you've got individual bid and win projects, and those can range from a few million up to tens of millions of dollars, it doesn't take many of those to be delayed before you'll have an impact to the revenue line, but pleasing to see none have been canceled. They've just been delayed by clients.

Yes. And just as a reminder, the D4C Sydney Water agreement, that will flow through that Comdain Infrastructure revenue line.

That's correct. That's right. Yes, absolutely. So that's commencing as of 1 July -- or has commenced as of 1 July.

Yes. Okay. Great. And then maybe if you can, and I appreciate it is difficult to talk about -- are there some of the opportunities of new programs of work that are out there? I appreciate they're probably paused or delayed. But could you talk to the opportunities?

Yes. I can maybe just provide some brief comments. I mean there's a number of opportunities in telecommunications sector. I think we'll continue to see upgrade and investment of telecommunication assets, both in wireless and fixed line broadly. Utilities has had a very strong period. We've seen an increase in tender rates and response rates to opportunities across the utility sector, will be my broad sort of comments without getting into specific individual opportunities.

And so just as a follow-up, obviously, with the issues in Victoria, can you see sort of hard close dates on those opportunities? Or do they -- is it an evolving process?

Not all the opportunities relate to Comdain operations in Victoria. The Comdain operations do span across New South Wales and Queensland as do our telecommunication operations. So it's not just Victoria-based. Victoria's one area. We haven't provided a breakdown of our revenue in state by state. Yes, I don't think it's going to significantly depend on Victoria. Victoria is a factor. We're watching very closely to see what happens here. But no, it's not the only factor we're watching.

Okay. And then last one for me, just on the M&A strategy, could you give a bit more detail around opportunities and the ability to actually conduct due diligence given the environment we're in?

Yes. No. I mean, we've outlined previously that the business has a very measured process to looking at M&A opportunities. We disclosed last half some DD work that was done on a number of businesses, and we've been able to continue looking at a number of opportunities over this period of the COVID pandemic, if you like, is the way to characterize it. We're fortunate that a number of discussions were already in place before that. So whilst they did slow down during this period and have -- and have slowed, we've been able to pick some of those back up in more recent times. So pretty confident that we remain well placed there. Again, we're taking a very measured approach. It has to be the right opportunity for us. We are looking at, obviously, continuing to diversify away from telecommunications, given that strong portion of revenue that exists in our telco area. So utilities is a natural area for us, a known market and there's a lot of opportunities to expand the breadth and nature of our services. A lot of the opportunities we're looking at there are private-based organizations. So whilst it is challenging to pick up new discussions and start new discussions during COVID, those that were existing around before have still been able to be maintained across the period.

Our next question comes from Piers Flanagan from CLSA.

Just a couple for me, if I could, and starting with the margins. I know you've called out a few reasons for the year-on-year improvement. This is in the telco division. Are you able to just give a bit more color on sort of those, I guess, the impact or the contribution of those points, and sort of how we should think about telco margins going forward?

Thanks, Piers. Appreciate that. We've just -- we haven't, obviously, as we've previously -- we haven't disclosed exactly the impact across those areas. That's the broad areas that have impacted our margins. Favorable work mix is one aspect. It certainly is pretty predominant there. So I don't think either of those 3 aspects have been more significantly weighted towards those margins than others. But yes, favorable work mix is probably, I think, the most predominant out of the 3, if I was to say, the impact. In terms of margins moving forward, look, I'm always very conscious that our margins in this area of business are very healthy. I don't think that we should be expecting those to go up any further. As always, as I've said, the ability for our margins to sort of fluctuate by 1 percentage point or so over a half full year. So I think at this stage, we're very cautious to expect and they certainly will not be increasing any further. We're cautious that they may decline, although we're not seeing anything at this stage, which indicates that they should be coming off significantly over the short term. Obviously, the renewal of these agreements will play a key part in that as well. Once we have the contract rates renewed and we understand more about the work type, we'll be able to look at that. I think the business has shown, though over time that we are able to drive internal efficiencies and productivity improvements, which have assisted margins also. So I certainly back our team once we have those agreements finalized to be in a good position to continue to hold.

Sure. And then just on the utility front, also and the margins, obviously bringing Comdain onto the group ERP system, opportunity there to increase from that 8%.

Comdain's margin is obviously lower than the 8%. The 8% reflects the combined utility group. I think when we've outlined Comdain's margin previous, I mean, it is actually above industry average. If you look at some of our peer organizations, you'll see margins are considerably lower than what Comdain is. But I certainly think, as I've said over the last couple of halves, we have been targeting a number of initiatives to try and drive some improvement in Comdain's margins. And I'm very pleased to see, albeit small, but some incremental improvements over this most recent half around their margins, I think, which bodes well for the future. But I'm not expecting to see a dramatic change over the short term.

Sure. And then just looking at, I guess, sort of tenders and sort of order book going into '21. So obviously, one sort of $200 million that you'll bring into FY '21. I mean excluding that, sort of how should we think of some of that carryover from the rest of the business? I know you've called out sort of NMRAs sort of the only major contract that's up for renewal, but a lot of that O&M and sort of panel work ongoing into '21.

Yes. It's all contracted. So if you look at the contracted base there, about 84% of our work is effectively -- we have secured the contracts to enable that work to flow here. That's probably what the -- the visibility is very good in relation to those areas. The question is always the bid and win projects that we need to secure throughout the year, and that's certainly the area of focus. But that's BAU for our business. I think we're well positioned with the contract base. So the contracts, being in place, will enable work to flow. It's dependent on clients as to the timing of that and the volume. But I think that having the contract is the first step, and we've shown that management can execute well and derive a very healthy margin out of it. So I think we're optimistic as we go forward. But as I noted in the group outlook statement, it's too challenging with current COVID-related matters to provide specific views on the year ahead.

Sure. And maybe just one final one for me, I guess, just on the outlook and sort of client workflow. I mean, obviously, sort of Q4 impacted by COVID. If we think of the conditions sort of as they stand today, I mean, have they held pretty constant sort of throughout June and July? I know you said there's some little green shoots as work coming back online, but sort of client feedback, is that at levels that were seen in the fourth quarter? Or are you seeing any more green shoots?

No. We started to see some discussions with clients. My reference earlier with green shoots around the moratorium on electricity and gas disconnections and I hoped, plan to have some of those recommence. We haven't seen a substantial shift or change from clients across other areas. It has been pretty steady. We'll hopefully see that improve over the first half. But again, I think that the group is going to be more weighted to the second half of this year, given what will probably be a slower response from clients to start to flow through some of that work.

[Operator Instructions] Our next question comes from Steven Anastasiou from Bell Potter.

A few questions, if I may. First one, the nbn activation and assurance revenue, it was down slightly versus the first half. But that comes in light of the nbn activation still being quite strong in second half '20. Was there any decline seen in activation tickets? Or was it maybe something to do with less lucrative maintenance work being available in the second half?

Yes. Thanks, Steve. That's a good point. We certainly saw that half-on-half decline in the second half. We actually saw activations in the first half come on very, very strong, as you would have seen from the nbn report those who track them. And then in the second half around COVID, we actually saw those start to come back, particularly in that last quarter. We actually saw them start to fall back. That's certainly one aspect there. Some of the proactive maintenance would have also been delayed in that second half, which is basically those 2 areas. Reactive maintenance works, they'll continue. Obviously, that's critical. Our market share held firm at around the 50% mark. So if you're tracking the nbn numbers, you'd be able to sort of deduce what our market share is there. But it's really just that proactive maintenance that can be delayed that was impacted in that second half, along with a lower activation number from, I think, April, May and June.

Sure. The outlook, earnings expected to remain resilient, but contingent on COVID impacts. Have you seen any material impact from Victoria entering stage 4?

Yes. We have had some impact to Victoria, really around only one area of the business. So we've engaged with clients over the period. And it's really just around our inspection programs with TechSafe, where some of the government organizations have opted to pull back their work. I'm going to say, a hibernation period across the TechSafe area. Obviously, it's a very relatively small area of the business that only impacts a couple of the contracts there. So that's the main area. We've not seen other impacts across any other aspects of the work other than some of the, again, proactive maintenance activities with some of our telco providers in Victoria having to be delayed.

Sure. A little bit of -- potentially, I don't know if you can provide some color around the resilient remark. Is that something sort of like a plus or minus 10% on the FY '20 result?

I'd have to ask Daniel Andrews about that. Look, I think the comment around resilience is really just reflecting the fact that we are -- I mean, I've been in the business now for 15 years, and it's very, very uncommon to have a period where you've only got one of your key material contracts coming up for renewal in the group. So I think 84% of our contracts being -- or work being contracted under those agreements I talked about provide that base. That provides great opportunity. The thing I can't dictate or accurately forecast is what happens to the volume of work. That's up to our clients to provide through. But the business is in the best possible shape it can be holding those contracts. And as I said, we've demonstrated over many years that once we have that work, management can execute it well and derive a very healthy margin from it.

Yes. Wireless revenue was impacted a little bit by COVID. Is there any change early in FY '21?

FY '21 is still very, very, very much -- we have 1 month of operations there. So the impacts there around client-supplied materials, and as I said, some restrictions around accessing remote regional areas has certainly been across some of the wireless operations. So we haven't seen a material pull back to sort of BAU yet there, but it's still very early. You generally have work in a wireless area allocated on a quarterly basis, so we need to sort of see how things go over the next couple of months.

Has there been any indication that some unlike Vodafone might increase their 5G commitment in the near term as a result of the merger.

It's a good point. Probably like yourself, we look at a lot of the headlines around 5G. And I certainly think -- not talking about Vodafone and TPG, but there certainly seems to be a lot of proactive, sort of, commentary on the deployment of 5G and how critical that's going to be. But we're probably seeing from our side a slower uptake in deployment of that technology. And I think I've discussed previously why that is. One of the things I'm conscious of is we also need just probably see a couple of catalysts occur here and one would be a 5G handset, an iPhone handset, et cetera. Once those sorts of things occur, I would expect that, that probably drives a lot more consumer demand for 5G services as existing handsets won't be able to utilize those. So I think we're still waiting on a few of those catalysts because really now 5G, it's quite sparked, not across the network, there is a small handful of towers that have been upgraded across the entire country regardless of which telco provider you're talking about. So I think that they're probably all waiting to see how that pans out over the coming months.

Yes. Comdain expanding into the western states. Now I imagine that are probably going to be relatively immaterial for FY '21, but you're building the base for long-term growth, how big do you think that market could be for Comdain?

The market across those 2 states is hundreds of millions a year in terms of revenue opportunity just across gas and water asset infrastructure upgrade, renewal, et cetera. I would try and target, hopefully this year -- don't hold on to this number, but I'd throw in target, hopefully we can deliver something around the order of $10 million to $20 million across -- in revenue across some of those areas. I think that would be a fantastic outcome for this year and provide a really stable base to continue to expand.

Yes, definitely. Dividend of $0.09 per share, a payout of about 74%. Now that you're in a net cash position, depending on how resilient these earnings turn out to be. If required to increase the payout to maintain that dividend, I'm sure the balance sheet, in your view, is good enough to do so.

I think we would assess that at the time. And the balance, thinking about that against would be potential M&A and expansion opportunities. So let's have that conversation in a couple of months' time.

Okay. The OMMA contract, how long is that being tendered for?

We are currently in discussions with nbn. It looks like at this stage, it's probably likely to be an initial period of, say, 12 months, which should probably form 2 6-month options under that initial agreement before nbn look at longer-term arrangements for those operations.

Sure. The Comdain residential land development, are you able to talk about how big that sort of revenue is for Comdain?

Less than $20 million.

Less than $20 million. Okay.

It's a minor area, but it has been a good portion of the Comdain business over the journey. I think we're, again, just conscious. I mean that was impacted probably by a decline in housing coming into COVID and then COVID. You've got probably a 6-month lead time there. We are [indiscernible]. We do probably 2/3 of the infrastructure in Victoria. So we will, I think, start to see that uptick with some of those government incentives and start to recover. But at this stage, that's been one of the areas that were impacted last year.

Yes. And last one from me. There was a nice increase in the nbn minor project revenue in the second half. Was that supported by sort of works to upgrade the network capacity in light of everyone working from home? Or…

Yes. It's a mix of things. So under that minor projects line that incorporates a couple of projects. But it is largely associated with proactive upgrades of network infrastructure. And you'll note in my comments earlier that actually in the second half of the year, we actually had a decline. It was creeping up over the first few months, but then came off as COVID came to bear. So it was a bit of sort of up and down, but still the half was better than the first half. But it is that discretionary spend by our clients on upgrading network infrastructure.

We also have our on-demand work in there as well.

Yes. Yes. The business on-demand is the other line. It's a minor aspect there, but that's another aspect to that line item.

[Operator Instructions] Leigh, it looks like we have no further questions from the phone, so I'll pass back for any final comments.

No comments from me. I thank everyone for their time in joining us, and appreciate it. Thank you very much.

Thank you so much. Ladies and gentlemen, that does conclude the call. Thank you for attending. You may now disconnect.