Thanks @nessy. And thanks again @Strawman for facilitating the meeting with Mike and Chris today.

For anyone interested in Stealth, I strongly recommend you watch their last two presentations. Start with the public investor briefing recording from yesterday which they have posted to the ASX (here). And then watch the Strawman meeting.

Mike was confident and positive, but not cocky. He has been a little guarded in years past but I didn't sense any of that this time. Nice to see CFO John Boland given airtime in the investor briefing. And great that Chairman Chris Wharton has shown an interest in rocking up to the last two Strawman meetings, highlighting his personal and financial investment in the company (he owns 2.7%), as well as contributing knowledgeably to the conversation.

I personally thought Mike might go silent on any further reference to his $200m and 8% guide for 2025. FY23 results, while very positive, were below the trendline needed to hit those numbers. My base case valuation for Stealth has them not even getting half way there by FY28. But, no, Mike and the Board have doubled down, putting these numbers front and centre in their reports and presentations. And if that's not enough they have also committed to starting an ongoing dividend by the end of FY24. They don't communicate these numbers as aspirational, they have communicated them essentially as guidance.

So, they have created high expectations. They need 27% revenue CAGR between now and end of 2025. They can't do all of that in 2025, so FY24 will be a pivotal year. Even if they can achieve half that growth, plus deliver on their promise of a dividend, plus expand EPS, Mr Market is going to have to acknowledge defeat and re-rate. But if they can't make solid progress, Mike's reputation will be damaged. At the moment the market is betting on the latter.

It will be an exciting year for Stealth investors.

Backing up the comments from today's discussion as well as yesterday's presentation.

Thanks @Strawman .

Absolutely brilliant discussion.

Mike and the leadership team have positioned themselves well to reap rewards over coming years of the relationships and with customers and suppliers.

Disc : Held RL and SM

I thought it especially interesting how much growth they expected on the organic front. I need to re-watch the meeting but pretty certain Mike said there was $60m in revenue that could be gained from expanding work with existing suppliers, who themselves are keen to engage more with a better coordinated B2B partner.

It's also worth pointing out how consistent the strategy has been since the get go. 5 years feels like forever for the market, but in that time they have grown the top line 4x (would be at least 5x if they didn't care about the quality of revenue) and massively streamlined operations.

So I'm bullish also.

Let me hasten to add, nothing is risk free and we need to see ongoing evidence of margin expansion, increased revenue growth and the claim of 95% of products being non-discretionary is something that's yet to be tested in a more difficult operating environment.

A few operational missteps, or a poor acquisition could really set things back a long way. And with razor thin net margins there's not a lot of room for error.

To be true to the Strawman ethos, I want to be careful we don't form an echo chamber and would love a well considered bear case. Or even just a few words of caution and restraint.

The reality is that Stealth is VERY illiquid and all kinds of wild and wacky stuff could happen with very little volume. Some of it may even seem good short term, but you have to be careful.

Pointerra was a company I very much supported, and watched that go from <10c to 90c and all the way back again. It can mess with your head, and people can easily get burnt if we aren't careful to remain grounded -- both in terms of expectations and value.

Buyer beware.

Did you ask for a well-considered BEAR case on Stealth @Strawman? Are you asking for some brave soul to speak out against a business on Strawman:

• Ranked #8
• With 74 SM followers
• With 54 SM investors

I don’t know that I can provide a ‘well-considered’ Bear case, but I can explain why I have previously owned Stealth but no longer hold it.

My case is purely based on past performance, which is flawed because we all know “past performance is not indicative of future results”!

Looking at Stealth’s performance since 2019 this is the track record:

• Revenue, $63 million to $111 million (1.76 x)
• Earnings, $520k to $902k (1.73x)
• Free cash flow, -$551 million to $5.4 million
• Profit margin, 2019 (0.8%), 2020 (0.3%), 2021 (0.7%), 2022 (-0.2%) and 2023 (0.8%).
• ROE, 2019 (5%) 2020 (3.1%) 2021 (11.4%) 2022 (4%) and 2023 (5.6%). The average ROE over the last 5 years was 5.9%. The industry average is 9.5%.

Source: Commsec

• Book value (shareholder equity), 2019 (14cps), 2020 (14cps) 2021 (14cps), 2022 (15cps), and 2023 (16cps).

The share price over the past 5 years has hovered around the book value (shareholder equity) of the business.

Source: Simply Wall Street

If you pay book value for a business your long term returns are likely to be similar to the long term ROE for that business (Happy to be challenged on that).

I can see the Bull case for Stealth based on Mike Arnold’s promise of profit margin increasing to 3%. However over the past 5 years the best net profit margin has been 0.8%, as it was for FY23. I guess I’m a ‘Doubting Thomas’ on profit margins reaching 3% given the five year profit margin history.

If profit margins were currently 3%, then net profit would be $3.3 million on an equity of $16 million with a ROE of 21%. Now that would be a BULL case!

While Stealth has reduced debt this year, the debt on equity has blown out over the past four years.

Net Debt on Equity has climbed from 17.6% in 2019 to 92% in 2023, and in that time the ROE has only marginally improved (from 5% to 5.6%).

Liquidity is another reason why I’m not excited about Stealth. It’s very hard to build a decent position without shifting the share price and if there is any bad news the share price will tank as investors stampede to exit through a narrow doorway! And don’t underestimate how far a community like Strawman can move the needle on the share price (either up or down) with a tiny market cap of $14 million.

Now this BEAR case is all looking backwards and Mike Arnold is promising huge margin expansion over the next few years. If this turns out to be the case (and I hope it is) there is a huge BULL case for Stealth. Call me a “DoubtingThomas”, but until I see a few years where ROE is higher than 15% I’d prefer to sit on the sidelines.

There @Strawman, there’s your BEAR case view from a contrarian to ensure Strawman is not just a community of “group think”! Now, please don’t shoot me down Strawfolk! :)

Disc: previously held IRL

@Rick thnaks Rick, i cant see a sustainable competitive advantage, but it is quite cheap if it hits anywhere near its targets, maybe a big if. Poido is on the board i just noticed, (knew him whne on citi desk) not mnay shares though 100k.......hmmmm

Love it @Rick!

With the foundations laid, we really should expect the numbers to start improving going forward. If they don't, it'd be a concern.

Agree @Rick. Liquidity means you have to wade in slowly and can't rush back out. Possible "lobster pot" if something goes wrong. For me, the compensating reward is that this could be a multibagger within 1 or 2 years. Not for the feint hearted.

I'm not worried about the debt. I believe they have used that wisely and are paying it off quickly.

Also completely agree Rick that Stealth's success rests on increasing margin. Revenue growth will be nice, margin growth is necessary for share price re-rate. Progress in FY23 was below the trend needed to hit Mike's goal. That's why I thought he might just go silent on those goals and give himself more breathing space. So I was surprised he and the Board have doubled down on their 2025 targets. They must be confident in early FY24 organic growth, clearly have an acquisition in mind, and see substantial revenue to be gained through bulk purchasing for their member independent stores. Mike and the Board have put their reputations on the line with their bold goals for 2025. But plenty of CEOs have failed before.. Your view Rick is the market's view. The supporters here on Strawman are the exceptions. The market doesn't believe Mike can hit those targets. FY24 will be a telling year - they either make substantial progress or the reputations of Mike and the Board are damaged.

Your Bull case is pretty solid @DrPete . Just thought I’d put foreword the alternative view and throw in a few from left field just to keep everyone grounded (DYOR). I’m starting to sound like Howard Coleman or Mark Moreland. Must be an age thing! :) When Stealth is trading at 21 cps in a few years time…this conversation never happened! :)

I've been watching $SGI for a while and recently caught up on the company presentations, SM Meetings, and various straws and valuations. I'm not sure how additive my following remarks are, but I was sufficiently impressed by CEO Mike, that I have taken a small initial position in RL (and will add in due course on SM).

@DrPete has set out a good range of valuation outcomes, and I think this sets out the investment proposition and risk-reward really well, even if I am somewhat less bullish (probability-wise) on the higher valuation scenarios.

Some highlights for me.

Industry Structure

Supporting the bear case, scale is important in this industry. Even though the industry is vast and fragmented, there are established players with orders of magnitude greater scale. Consider Wesfarmers Industrial and Safety Division with $2.0bn revenue and 5% PBT margin (albeit a decent chunk of this is Coregas). There are also focused category leaders such as RSEA Safety (c. $350m revenue in a focused category set and 80 stores) and companies like $BAP, focused on automotive trade. Then there are the procurement specialist firms that take on the MRO responsibility for the end customers, and contract with the category supply leaders (an example would be Fergusson Industrial, among many others). Several of these firms have participated in decades of procurement outsourcing and supplier consolidation initiatives, including continually testing the market to drive savings and service quality. So I am highly sceptical when I read or hear references to "competitive advantages". There is a very competitive market and margins will be thin.

All that said, it is a highly fragmented market, and if Mike is right in that (depending how you measure it) the addressible market is somewhere in the vicinity of $40-65bn, then considering category specialist leaders, multi-category players, and MRO contract managers, then you've probably got 20-30 players in the $0.2-2bn revenue range, accounting for maybe only 30-50% of the total market, so a very, very long and fragmented tail, with many relatively unsophisticated buyers.

Another factor is that many OEMs maintain direct relationships with their end customers, focused on the most valuable accounts and for the higher value items. I have a friend who is the CEO of a industrial equipment supply company and another who is national sales manager for a local agent of a leading specialist industrial equipment provider. Both find their offshore OEM suppliers working to support their success, while at the same time competing with them to get to the most valuable customers directly.

$SGI's Achievement to date

So what impresses me about $SGI is that they have created a profitable company at such modest scale. There are some features that make the model interesting:

• Hybrid of direct and partner channels to market. Through direct stores they'll maintain knowledge of end customers. For partners they deliver "buying power" and supply chain infrastructure, so that owner-operated local businesses can focus on their customers. Being part of a "consortium" of buyers under the $SGI umbrella is vital to the ongoing viability of these small operators. There are lots of examples of this in other industries overseas, although I am less familiar with them in Australia.
• Investment in a lean, plug and play technology stack. For example, electronic sales tags linked to the inventory management system and bar code scanning, eliminates paperwork and manual effort. Integration to competitor price-scraping and dynamic pricing is the state-of-the-industry, and they appear to have achieved it at a pretty lean level of technology investment. Impressive. While it is not a competitive advantage with the bigger players, it will put them ahead of many of the smaller market incumbents. (The fact that $SGI is growing now is potentially an advantage, as they will be more nimble than establised, larger players who may be encumbered by legacy EPR-type systems.)
• Integrating the 7 brands into a centralised "buying office", leveraging a common tech stack and supplier relationships.
• Recognised the potential value of "white label" deals - again it is interesting to see a relatively small player getting on with this so early in its life.

It is also important to note that they have achieved their progress during a very disrupted time for supply chains!

Things to track

I am not to worried about the $200m revenue target. It is clearly an aspiration that is driving them, but everything I have heard Mike say leads me to believe he will not chase unprofitable revenue or expensive acquisitions to achieve this. I'd be prefectly content if they fall short of this metric but make progress on returns.

There are a few interesting metrics to track over time.

I liked the example of >$60m revenue potential in the 5 largest suppliers who are supplying existing partners outside of $SGI. This is clearly the priority target, Of course, there will be a longer funnel of opportunities across the 2500 supplier base. Progress against this is something that we should continue to ask Mike about at future investor calls.

They clearly believe they have a scalable platform. The reference that cost to the company of revenue being $0.24, down from $0.265 and targeting $0.19, with an expectation that the next incremental $20m of revenue will flow 10% to the bottom line are measures that should be easy to track over the next year.

Mike also appears to be embedding a culture of efficiency and capital discipline, in coaching staff to focus on contribution rather than revenue. Walking away from customers that aren't contributing exemplifies this discipline. In this business, inventory is THE key source of capital, and it has to turn! (Just to underscore this, the market cap of $SGI is only $14m: closing inventory was $15m, receivables were $17m and payables $21m,... so they are doing pretty well with a cash conversion cycle of 28 days. That's a key metric track as they scale.)

Dividends

Like @Strawman I am not convinced about the wisdom of issuing dividends. I see that Mike and Chris have a shared vision of creating a sustainable business, and offering tangible returns to shareholders. So I get the story, even if I don't agree with it.

They are at such an early stage in building scale. Once they get to $200m revenue, they will likely see opportunities for acquisition that are larger than they might contemplate today, and will likely have to go back to shareholders for capital. Of course, if they can get their margins up, maybe they can achieve some modest moves using FCF and debt.

That said, where a hybrid of organic and inorganic growth is such an explicit part of the strategy, I'd prefer to see them build the war chest that gives the freedom to execute (in the way that RW has at $WTC).

On the other hand, disciplined capital allocation might keep them focused on smaller acquisitions, with lower execution risk. (The last thing I want to be part of is a roll-up that evenutally blows itself up!)

My Key Takeaway

I've resisted buying $SGI up until now partly because I question myself when I become part of a group-think, and $SGI is highly-rated on SM, with the @Strawman himself having to check his own gushing in the interview. However, just because others have a good idea before you and share a contrarian view of the market (whatever that means for the micro-cap like $SGI), doesn't mean they are wrong. I think the numbers speak for themselves.

I'm not worried by the liquidity. I'll happily hold my small stake for years, and would hope to add to it as the company progresses.

One contrary view might be some of the differences between what was said a few years ago and the results today. I might try and go back and check that at one point.

I do hold a small amount.

@Hackofalltrades this question was asked in the results webinar. Worth a listen, Mike pointed out how different the buisness is today compared to what it was at IPO and basically pointed to all the positive changes and improvements in their metrics as a better yardstick than a static plan from 5 yrs ago. I actually meant to go back and look at the IPO documents but haven't yet.

The bear case on SGI for me is that management are either unble to get margins up to the 8% mark (although even at 6% they still win) or unable to continue growing revenue organically, or most concerning is they do a large aquisition that doesn't go smoothly in the culture refit. In summary my bear case is that they aren't able to deliver on their stated plans.

For me this isn't a case of trying to second guess how competitors will react or trying to model how costs will affect the thin margins of this space. I am happy to give them my capital until they lose my trust.

My bull case is the inverse,I trust Mike to deliver and to date he has done a good job and I will continue to back him and monitor the progress against the yardsticks they have put out in the public domain. The recent SM interview gave a few good insights on why they are expanding their niche, its always hard to judge from outside but it does look like they are doing somethng unique relative to the wider industry.