Stealth has been on a flyer recently. Awesome news for many of us in the Strawman community. And I have to say especially comforting for me given I’ve just retired (take that “sequencing risk”!). But it has also prompted me to dig back in and reassess my thesis. Big picture, I think Stealth is approaching fair value. There’s definitely a healthy chance of ongoing strong returns. But the bull case now requires solid ongoing execution. And the heightened share price has inevitably increased downside risk.

Bull case

• On most financial and operational performance measures Stealth has shown continued improvement over the last few years.
• H1FY25 revenue was up 27% vs pcp. Even assuming no organic growth, H2 and full year is likely to show similar growth vs pcp thanks to the Force acquisition. Revenue per customer, per order, and per employee have all shown impressive improvements.
• NPAT of $1.6m for the half exceed the full FY24 NPAT (admittedly, helped by a one-off currency gain of $0.5m from Force acquisition). Mike reiterated his guidance of 1.5%-3% NPAT for FY25, which appears very achievable given H1 NPAT of 2.2%.
• EBITDA was 7%, already close to Mike’s FY28 goal of 8%. Mike claimed that incremental EBITDA for the period was 15%.
• Debt has been reduced to essentially now reflect inventory; prior debt associated with acquisitions has now been paid off.
• Annual dividends have commenced.
• Opportunities for further growth include introduction of exclusive products, acting as bulk purchaser for the store network, introducing an equipment hire service, and cross-selling Force products with Industrial customers (and vice versa).
• Future acquisitions will be easier now with a strong share price.
• Mike’s blue sky goals (which I believe are unlikely to be achieved) of $300m revenue and 5% NPAT for FY28 would produce earnings of $15m. If achieved, that would be about 25% revenue CAGR and 70% earnings CAGR. Those numbers would warrant at least a PE of 30, giving a possible market cap around $450m, compared to around $80m cap at time of writing, giving around 75% pa ROI for shareholders. In which case a fair current share price, discounting at 10% pa and allowing for 30% dilution, is about $2.20.
• If you don’t believe the above scenario is likely (and I don’t), a more realistic bull case might see Mike achieve 75% of his FY28 targets (which is aligned with him likely achieving around 75% of his goal of $200m for FY25). In this scenario we have $225m in revenue in FY28 (about 15% CAGR), with 3.75% ($8.4m) NPAT (about 40% earnings CAGR). Warranting at least a PE of 20, this scenario gives a market cap in FY28 of $168m, more than double current market cap. Allowing for 20% dilution along the way, shareholders achieve 20% pa return. In which case a fair current share price, discounting at 10% pa, is about $0.90.

Bear case

• Revenue growth has been predominantly through acquisitions. Without the Force acquisition, revenue would have declined (admittedly, as a result of closures of unprofitable stores and accounts). Stealth hasn’t yet demonstrated a clear ability to organically win market share.
• The recent Force acquisition might not be a good fit, with added complexity and cost outweighing any synergies.
• The revenue growth that has been achieved has occurred alongside issuing 17% additional shares. A small percentage of this dilution came from dividend reinvestment and management incentives, but most of the increase was required to fund the Force acquisition.
• Stealth’s history of profitability is short, and can’t yet be confidently asserted as sustainable. Even though EBITDA has hit 7%, NPAT is only 2.2%, creating doubt in Mike’s ability to hit his FY28 goal of 5% NPAT on 8% EBITDA.
• A bear case could see revenue growth stumble along at 5% pa (higher than current organic growth) and NPAT plateauing around 2.5%. Despite Mike’s lofty ambitions, this would see FY28 revenue around $175m and NPAT around $4m. With a PE around 12, that gives a market cap of $48m, well below the current $80m. In which case a fair current share price, discounting at 10% pa, is about $0.30.

Thesis

• If I assign probabilities of 10%, 50% and 40% to the above three scenarios I get a risk adjusted current fair share price of $0.80, a little above the current price.
• The thesis for Stealth has changed substantially since I first pitched it to the Strawman community back in Oct 2021. Back then I saw it as a bargain at a stupidly low price, with not a lot that needed to go right to produce a healthy return. My base case back then suggested a 40% pa return over the next 5 years.
• With the share price moving from around $0.12 to now over $0.70, much of the untapped value in Stealth has been soaked up. Stealth is no longer a bargain, but instead is close to fair value. The thesis now depends on solid ongoing execution. To his credit, Mike has shown strong execution and capital management to-date, but that needs to continue for Stealth to continue to deliver good value to shareholders.
• The current share price around $0.70 assumes that Mike achieves roughly 75% of his financial guidance, but takes 5 years to get there (instead of his stated 3 years). Whereas if Mike can stay on track to achieve at least 75% of his goals, by end of FY28, then the current share price is still undervalued. If Mike manages to achieve his stated FY28 goals in full, then there remains enormous value.
• At current share price, my minimum expectations for FY25 are:
• Revenue of $140m to $155m (the lower end assumes ongoing economic headwinds and some more store/account closures)
• NPAT around 2% and $3m (Mike guided 1.5% to 3%, and was 2.2% for H1FY25)
• Assuming FCF roughly the same as NPAT, that would be a full year dividend roughly the same as last year of about $0.008 per share (roughly 1% yield).