Pinned straw:
Further to @Tom73's straw, here are the notes I took at the AGM today.
I won't summarise Chairman Chris Warton's address, which you can read here.
Mike gave up an update presentation which had some usefuly information. I'll focus on two elements:
- FY24 Trading Update
- Update on Strategic Initiatives
Overall, he was his usual matter-of-fact delivery style, although at the start he indicated his delight at the recent share price progression, and clearly sounded more upbeat that the progress they are making is getting recognised.
1. FY24 Trading Update
The Trading Update gave information on the 1st four months of 2024.
The chart below shows how the segmental split of sales has evolved, with two views presented: product segment and customer segment. The shares of workplace, safety and automotive segments have all increased slightly at the expense of industrial. On the right of the chart, Mike noted that declining share of Retail and Trade and Other (“small end of town”) customer segements is consistent with the overall trend they are seeing in other businesses.
In the next slide below from Mike’s presentation, it is titled “Highlights - year in review” but it has some relevant current year insights, which I will explain below.
Mike noted that on sales revenue in 1H FY24 vs FY23, they achieved 15% EBITDA “received on additional sales” – this is a key metric Mike has referred to in the FY23 results and, also, I think in his Strawman meeting. Given their statutory EBITDA Margin in FY23 was 4.8%, this would indicate that operating leverage is coming through as Mike has indicated it would. Should this trend continue, it will drive ongoing margin expansion over time. And Mike discussed this in terms of their target to achieve 8% in FY25, and also its significance in terms of their target range of achieving 10%-15% EBITDA margin on all incremental sales into the future. Good to see the evidence showing through.
On scale benefits, Mike described how the centralised purchasing office is achieving scale benefits. This is achieving a 2% to 4% uplift in margin, equating to $1.3m NET, with most of the benefits starting to flow in January / February.
Of the 8 new contracts signed last year with customers, 2 will start in March and 1 in May, with pre-determined order values with purchase orders supplied. One is for $6m for a supply over a two-year period. Mike said “We’re getting invited for big tenders, we’re winning those big tenders. And the investment we’ve made in technology has allowed us to onboard large customers now that we have an EDI linkage … which means that every order they supply to us comes automated instead of via email or via phone and then we manually have to key that in.” So, he said this is driving the people efficiency metrics, which I’ll show below, 2 slides down.
The trading update is shown in the next slide.
Against the 1H revenue target range of $55-$59m, they are at $39.0m after 4 months.
So, by my maths that's 68.4% of the mid-range with 67% of the time elapsed. (But I have no idea what the seasonality is towards the year end, so I can't read anything into that.)
Looking back at the same time last year, their 4 month result of $36.0m ended up being 68.7% of their 1H FY23 result of $52.4m. So they are pretty consistent.
The $39.0m represents +8.3% over the PCP.
So, overall, they appear on track for revenue to be within the 1H guidance range.
On costs, Mike spoke about some of the wage inflation challenges and said “our costs have increased roughly 7.4% since 1st July.” The are clawing this back in the "pricing reset program", mentioned at the FY23 results, however they are only 17% of the way through this, so there is still margin “uptake” still to come. Mike said “we are receiving more gross profit per order and that will obviously benefit us as well when our results come out.”
Mike noted that 1H represents about 42% to 45% of the FY result so, from his perspective, he considers that they are “sitting ahead of plan, which is encouraging.”
Mike then showed the comparable per day metrics over the 1st 4 months FY24 compared with FY23, slide shown below.
I note the daily sales are higher than I calculated in the pcp comparison in my analysis above. Overall, these metrics are encouraging.
I haven’t tried to calculate the potential EPS – slightly tricky with the FY23 result coming off a small base. But they should be making decent progress off these operating metrics.
Encouragingly, the overall business progress appears to be holding consistent with the “non-discretionary” banner that both the Chairman and MD tout.
2. Update on Strategic Initiatives
Mike called several strategic initiatives:
Loyalty Rewards Club, which gets rolled out in March. They hired a couple of people with experience doing this elsewhere, and expect it to drive both revenue and profit.
Launch of a Superstore format, coming first with a redesign of the Brisbane facility, and then will be replicated elsewhere. They are getting support in merchandising and fitouts from suppliers, so not having to bear the full cost. Four other locations have been identified for refurbishment and fit out.
Consolidating Skipper Transport into Heatleys to create a new category format of “Safety, Industrial, Automotive”, something Mike says he saw in the US, and where he perceives there to be a gap in the Australian market. By December the two current ERPs will be integrated onto one system – “quite a significant investment that we’ve made”.
Launch of a Hire Business operation, already operating in Queensland, but to be rolled out across the network focused on the “smaller end of town”. It covers tool, equipment, and lighting, and has alongside it the sale of all the consumables, PPE etc. that are needs for any hired equipment operation. Mike spoke about the attractive metrics, with payback on investment in the first 13 weeks, whereafter revenue drops straight to 100% gross profit, and then items are sold after a further period to recover value.
My Overall Takeaways
Good progress showing through on a range of metrics and very consistent where Mike indicated the business would be heading at FY results and at the SM meeting.
I have only a small position, which I am minded to increase, but will wait to see if there are opportunities to do better than today's SP.
Disc. Held in RL and SM
Great write up as usual @mikebrisy. The only thing I would add is the positive culture that Mike and the team have created and that I think they are very proud of. I think this is a strength that underpins the positive numbers and their excitement and willingness to expand the business into the complimentary niches they announced.
The importance of culture to stealth is a theme that I have picked up on for a while from their preso’s, but I am always a bit sceptical of how much is real vs lip service. I am increasingly becoming convinced that they do care about this and understand the positives to the workplace and business if they get this right. They highlighted 50% board representation is now female, and he spoke about some of the company wide events they do. Culture is always hard to assess from outside glimpses but I think they are on the right track.
the other thing I found interesting was the comments from the chair on the WA economy- which he said is flying and is really going at a different speed to the east coast. This is a positive short-medium term tailwind given a big chunk of their sales are still west coast and mining related.
@DrPete I have been thinking along the same lines as you, the business is now relatively fair valued, and while their is still plenty of upside this is starting to be priced in to some extent. The way these microcaps swing between everyone wants to buy to everyone wants to sell really is amazing. I am also pondering whether it’s worth a quick trade to sell some of my holdings around the mid-high twenties and expect to buy it back at 17-18c in the new year, but this might be a bit cute.
Great notes @mikebrisy , thanks. Agree with everything you have stated. Love the enthusiasm of the team and the way "old blokes" are going about business like "young blokes" with their views on data. The initiation of a loyalty rewards program will be interesting. In general these programs seem to add value. It would be interesting to follow the stats on how much they are spending on setting up the program (employing 2 people for a start) vs how much is returned on this investment. All the "cool kid" companies out there seem to do it well so hopefully the Stealth team can implement well too.
Also love their margin expansion and being able to pass on their costs.
Looking forward to following the development of the hire business, especially if they do end up getting equipment paid back in only 13 weeks.
Nessy
disc - held IRL
@mikebrisy great summary and alot to sit back and digest and reflect.
What i am seeing and enjoying is the multiple ways Stealth are able to grow and grow profitably in 2024 and beyond.
I sense the executive team have seen opportunities emerge as they have consolidated and improved the operations which has provided the platform to grow in confidence for the next 12-36months.
There is no doubt there is more confidence in Mike both at today's AGM and the last meeting on Strawman on the ability to execute and as time lapses we will see the performance.
It would not surprise me to see the 200m surpassed by 2025 as the combination range and new superstore role outs as well as acquisitions propel the business.
This to me was great to witness today.
What i am really enjoying is the use of data by Stealth.
Having worked for large FMCG (WOW) as well as national pharmaceutical distributors (API) through to small private auto distributors (HSY Autoparts) the quality and use of the data / reporting is first class. What we are seeing on how decisions are being made by Stealth is not common especially at a organisational level. The organisation clearly thrives on data and i would love to see how on a daily basis this is used within their business and shared to create the positive culture.
What I also would like to add is the consistency.
A key attribute in my investment thesis when allocating funds is skin in the game by the leadership and secondly, trust in management
Stealth deliver on both of these.
Look forward to watching the results unfold and will provide an updated valuation.
I have been fortunate to build a large position over the past 2 yrs and have a higher degree of confidence as time unfolds ( like Bitcoin).
Disc : Top Holding in Portfolio on SM and RL