Pinned valuation:
Is this thesis creep?
With shares now at my previous valuation (23c, see below), there's a case to be made for taking some profits. Right? Especially with shares now representing around 1/4 of my entire Strawman portfolio (and a decent chunk of my real life portfolio too).
I mean, if I didn't already own shares, and I was looking at them today at 24c, would I put 25% of my capital into it? I very much doubt it.
On the other hand...
Overthinking valuations and weightings have led to some of my biggest investing regrets.
Moreover, the previous valuation was based on some pretty undemanding assumptions.
It always feels reckless to suggest a valuation of more than double the current market price, and with Stealth at 12c you could already suggest a healthy discount to fair value by low-balling some of the variables. I mean, that was essentially a major plank of the investment thesis -- the asymmetry in return potential.
But if we dare to venture more ambitious -- yet still reasonable -- assumptions, what sense of value can we build?
Keeping it simple, I think you can lay it out like this:
They have an FY25 target of $200m in revenue with an 8% EBITDA margin -- much of which should be organically driven. And we've seen some good progress towards this goal.
So let's assume that's directionally right, but they fall short of their revenue and margin forecast; let's say $160m in revenue and a 6% EBITDA margin.
That's still an EBITDA of just shy of $10m. Probably a cash NPAT of roughly $5m or so.
If that were true, you'd only need a PE of 10 to double the current market cap. A PE of 15 would give you a per share value of 75c by the end of FY25 (18 months from now).
As always these are just guesses; it's yet to be seen if the company can sustain margin expansion, and there's still a lot of work to do. NPAT at the end of FY25 could easily be just $1-2 million. Maybe shares fail to ever see any multiple expansion.
OR, maybe they do indeed hit their targets, grow NPAT to $8m, and trade at a PE of 25 -- a price of $2/share, 8x from the current price...and in less than 2 years!
Recent progress with the business does seem to allow for a bit more conviction, perhaps, but (again) it feels a bit reckless to suggest with a straight face that the fair value of Stealth could be $2/share.
The point is that, if you allow yourself only a bit more ambition, you can still advocate for a fairly good upside from here.
So I'm going to increase my valuation, but hopefully still stay pretty grounded in terms of expectations. Specifically;
A FY25 Revenue or $160m and NPAT of $3m. And I'll give that a PE of 12 for a target market cap of $36m, or 36 cents per share.
Am I moving the goal posts? Is it not wise to take some money off the table?
Always keen to hear what others are thinking, and given the ranking of Stealth in the community I'm sure others are wrestling with this one too.
Old Update from May 2023. Valuation of 23c
Ever since @DrPete first pitched Stealth Global, it's seemed super cheap to me.
Sure, it's small, illiquid and some divestments and acquisitions made the numbers a little messy. And yes, it's not immune to supply chain and inflation issues. It could also face some headwinds if you had a particularly bearish macro view (although I'm of the view that a domestic Capex boom is likely as the world pulls back on its reliance on China et al)
There is some debt too -- but this is 2x EBITDA and given the dilution potential with the equity alternative, the relatively modest cost of debt and ROI of these bolt-ons, it doesn't strike me as especially risky. In fact, it seems prudent.
If this were trading on a PE of 20x or even 15x, i doubt I'd have much interest. It's not a sexy company that will change the world.
But this is a business on track for at least $115m in sales this year and that is also delivering organic growth in continuing operations. Mike has repeatedly said he expects margins to improve (previously quoting US-based contemporaries on 12%+ EBITDA margins). Thumbsucking an underlying net margin of 2% doesn't seem reckless. And that could easily by 3% in the coming years, if not more.
So SGI is presently on a forward PE of around 6.
If this were a larger, more liquid stock, I think it would trade at an underlying PE of 15-20. But given where we are, I feel 10 is more appropriate -- if not perhaps overly conservative. But at that level the fair value is still 23c -- 74% above the last traded price.
As always, valuation is a dark art which is only as good as the assumptions used. But the asymmetry here seems very favourable.
One small note @Strawman, although I don’t think it changes your valuation meaningfully, the $200m and 8% EBITDA aspiration is “2025”. Given Mike hasn’t specified “FY2025” I’m conservatively assuming CY2025. But, like you, I’m assuming that will be missed by a long way.
"It always feels reckless to suggest a valuation of more than double the current market price, and with Stealth at 12c you could already suggest a healthy discount to fair value by low-balling some of the variables. I mean, that was essentially a major plank of the investment thesis -- the asymmetry in return potential."
Why does it feel reckless to suggest a valuation of more than double the current market price? Given the market is wildly inaccurate some of the time, surely some of our valuations should be double, triple, or even more? I guess often the issue is the market has seen something we haven't. There may be a difference between the true value of the company and the expected value of the company given all the publicly available information.
"I heard through the grapevine that a trading service has been promoting it recently, so maybe we're just seeing the result of a bunch of hot money. The kind of capital that is there for a good time, not a long time.." - What kind of trading service?
Is it thesis creep? I think yes and no.
The original thesis was that you could get a healthy valuation by low-balling some of the variables.
There has been a price increase and valuation increase since then. So, has the thesis changed? Well yes.
I think, however, that there has been a recognition of value along with some positive updates, which has potentially altered the actual value of the stock. The initial assumptions were conservative, so these updates make it seem like the more bullish results are more likely. Essentially, the original thesis was value, but the current thesis is still value, it just looks different and perhaps is more risky (or maybe less because management is proving decent).
As was mentioned above by Gazd I think this is very different to the thesis creep on the downside.
@Strawman given that I sold my SGI yesterday, your post was timely. I don't think your wrong and I can see many future scenarios where they hit their revenue targets and expand their EBITDA margins. I don't think it is thesis creep, but when everyone is patting themselves on the back I have in the past regretted not selling.
My main reason for selling yesterday was to realise some SM cash. I have kept my real life shares but will be looking to sell a chunk of those if we get closer to 30c.
To me when they were 14c they didn't need to do much to be worth more. Now that they are 25c I think their are expectations built into price around growth, wherease I think they are more of an efficiency/productivity improvment driving the fundamentals rather than a real growth stock that deserves a high multiple. Not to say this isn't good but I think the market expects a fast trajectory and the NPAT line to expand quickly. I am not as convinced that this will happen in the next set of results. I think the price has got a bit ahead of itself mainly on enthusiasm. I am also a bit nervous when the buy/sell spread is so dominated on the buy side with relatively low daily volume. Ten baggers are nice but I am more than happy to settle for 10 x one bagger.
One of the mistakes I have made in the past in smallcaps/microcaps is not selling some/all when they go for a decent run, even when I know its just momentum pushing it. These runs are never sustained in a straightline and I fully expect to be able to purchase SGI shares again in the 15-18c range. At which time I am ready to move quickly, unless of course something has fundamentally changed. So in essence I am locking in a doubling with an expectation to make a 30% profit on the swing trade in the next 6 months. If I am wrong and they report really solid number in February then I can also buy them back derisked at 30-35c.
I am also expecting a cap raise for an acquisition at some stage if the SP moves much higher. This is probably more 8-12 months away though.
Is this thesis creep @Strawman
first of all let me say bluntly I’m not experienced enough to give advice to the experienced investors on this forum.
i would like to make a couple of observations however: