Pinned straw:
To paraphrase @Rick's excellent recent straw on Acrow, Stealth is the Little Engine That Might Be Able To. The journey up that hill is slower than I expected. But it is consistently pushing forward. And if it can get there the payoff is huge given low current expectations.
I've been one of the leading advocates for Stealth on SM. A year ago I posted my thesis for Stealth for FY23, which had four parts: $115m rev, $1.5m NPAT, net debt:EBITDA less than 3x, and no capital raise less than 20c. So, 2 out of 4 achieved. All up I'm a little disappointed. But still positive.
The cons: Revenue growth has slowed, and underlying organic growth is slower than headline growth when you take out impact of acquisitions. Progress in growing NPAT is glacial. Mike did not set any guidance for revenue or NPAT for FY23, so even though they missed my expectations, I can't technically give Mike a cross for these. But there is a growing gap between current stats and Mike's consistently communicated targets of $200m rev and 8%+ EBITDA for CY2025. 8%+ EBITDA may still be achievable, but I'm making the call that $200m revenue is not (and I never thought it was; only my 5% probability "blue sky" scenario for Stealth has them getting close, hitting $200m in FY27 not 2025).
The pros: Nothing went backwards, all key stats continue to steadily improve. Planned reduction in debt is on track. There is a clear pathway to previously guided dividend end of FY24, which might be somewhere around 4-5% fully franked yield on current share price. Mike did not get tempted to drive revenue growth through low value acquisitions that would have been painful given debt and share price levels. And potentially the most exciting (and stunning, if there are no catches) is the $5.6m free cash flow (but I need to understand how $5.6m free cash flow reconciles with an "underlying" EBITDA of $5.3m and NPAT of $0.9m; at first glance, these figures don't gel).
And the biggest pro is what I still see as a huge margin of safety. With a tiny current market cap of $12.5m, my base case over the next 5 years is CAGR of only 6%, reaching NPAT of 3%, dividend yield of 2%, and PE of 12, which would give market cap of $51m (ie a 3 bagger) and 5 yr pa ROI of 36%. This is still the highest ROI of all companies I have analysed, and hence still my highest conviction. I'll revise my valuation when I see full reports, but I'm not expecting a massive change based on these preliminaries.
Go little engine, I think you can!
Improving margins are key to the investment thesis, I agree @PinchOfSalt
Still, on the numbers presented things seem to be moving in the right direction (although I was hoping NPAT would be better)
Mike has said previously he is targeting an EBITDA margin of 8%, so definitely a good way to go.
There's been a lot of talk about cost synergies, and an established fixed cost base. And there has been some price increases in the second half too -- all of which should help boost margins further in the coming year.
But a lot of detail is missing in this update. I'll be keen to see the full set of accounts.