Service Stream's defence pivot has fund managers reassessing the earnings base

Service Stream has gone from a stock the market once treated as a broken contractor to one that fund managers now describe as an under-owned defence and utilities story with earnings upside still to be recognised.

The clearest articulation of that shift came from Ophir Asset Management, which said in an Article in June 2026 that it initially bought into Service Stream in 2023, after the market had already written it off as a typical bad contractor story. The company had taken on several utilities contracts that were poorly priced and poorly risk-managed, margins had collapsed, and the stock had derated heavily, Ophir said, but the manager believed the opposite was true given the contracts in question were finite and management had evolved.

Ophir laid out three reasons it has kept adding to the position over the past year, all pointing to earnings upside: utilities margin recovery, a step-change in defence work, and growth in telecommunications contracts. The manager said the 1H26 result showed utility EBITDA margins reaching 5.5%, up 130 basis points on the prior period and ahead of the segment's 5.0% repositioning target, and it expects margins to keep expanding toward 6.5% over the next two years.

Defence becomes a fourth pillar

The biggest structural change managers are pointing to is Service Stream's move into defence services. Ausbil Investment Management said in an Article in June 2026 that Service Stream is an essential infrastructure service provider that has recently secured a services-based defence contract, making defence the fourth pillar in its business, and quoted portfolio manager Jennings describing the stock as undiscovered, under-researched and under-owned.

Ausbil said Jennings believes defence could be a billion dollar revenue line in the next few years, up from around $240 million currently, which would be transformative for a company trading below the market multiple. The manager also pointed to the roughly $9 billion pipeline of works in telecommunications and utilities behind that defence growth.

Ophir put a figure on the same contract, noting Service Stream was appointed as a Tier 1 Defence contractor under a six-year Property and Asset Services agreement with the Department of Defence covering the Northern Territory and South Australia, with an initial contract value of $1.6 billion over six years. The manager said facilities maintenance in that market has historically been a duopoly dominated by Ventia and Downer, and Service Stream is now part of that conversation, with potential for Defence revenue north of $250 million annually at margins above 5%.

Telecommunications and a growing work-in-hand pipeline

Alongside defence, Ophir pointed to the telecommunications segment's transition to a new NBN Field Services contract with exclusive coverage of Victoria, South Australia, Western Australia and the Northern Territory, a new five-year strategic partnership with Telstra, and a new program supporting Optus HFC decommissioning. Work in hand has grown 55% on the prior corresponding period to $9.2 billion, the manager said, with average contract tenure now 17.5 years.

QVG Capital made a similar point in a Monthly Report in May 2026, noting Service Stream had completed an acquisition of an electrical contractor at a smaller scale, and that contract awards to the tune of $450 million and good progress on the ramp of the new defence contract bode well for future earnings.

Ophir argued the market is treating Service Stream's FY26 headline numbers, revenue down 5.8% on the prior corresponding period due to a telco skew, without giving credit for the order book behind them, and compared the stock's valuation to peers Ventia, Downer and SRG, arguing Service Stream may in fact carry higher-quality, more annuity-like earnings.

Recent history: from new position to top contributor

Managers building positions earlier in the year gave a sense of how quickly sentiment shifted. Centennial Asset Management said in a Monthly Report in September 2025 that Service Stream secured a Base Service Contract with the Department of Defence to provide Property and Asset Services for 113 Defence sites in South Australia and the Northern Territory, commencing 1 February 2026, with the work worth approximately $1.6 billion over the initial six-year term. The manager later initiated a new position in the stock in a Newsletter in May 2026, citing increased exposure to digital and resources infrastructure.

Prime Value Asset Management said in a Monthly Report in May 2026 that it has followed and owned Service Stream for more than 10 years, since it was a micro cap, and that management have done a great job expanding opportunities, improving margins and building a resilient business, while noting the stock remains relatively undiscovered.

What managers are watching next

Ophir's June 2026 Monthly Report summed up the current state of the thesis: Service Stream, which provides utility, telecommunications and facility maintenance services, added another vertical in defence maintenance that the manager believes can grow larger than the market is anticipating. With utilities margins still recovering toward target, a defence pipeline now worth potentially over $250 million a year, and a work-in-hand book that has grown 55% year-on-year, managers say the next catalysts to watch are further defence contract wins and confirmation that consensus FY27 earnings estimates move higher.