Forum Topics SGI SGI Share care preso

Pinned straw:

Added 2 months ago

Stealth just issued another slide deck, as part of a presentation to ShareCafe.

I'll highlight what i see as the new information in a minute, but boy, this really hasn't been a smooth process.. As others have noted, you have weird (nonsensical?) performance calculations & inaccurate charts, and less than 24 hours after your own investor briefing, you do another with a 3rd party that includes new information..!

Probably a reflection of a small team, and maybe it's a good thing they aren't engaging some IR firm to manage things (and exaggerate them). But still.. it's a bit amateurish!

Anyway, here's the latest presentation -- Stealth-Investor-Webinar-Presentation2.PDF

The key differences to yesterday's presentation i saw were:

  1. The most important difference is Slide 18 which provides specific financial guidance for FY24, including expected year-on-year growth ranges for sales, gross profit, EBITDA, EPS, and capex. This forward-looking information may have been discussed verbally yesterday? But I don't believe so.
  2. Slide 10 provides updated "Key Numbers" after the acquisition, such as the $159.0m pro forma FY24f revenue, 250 team members, and over 3,310 retail reseller stores. The first presentation had slightly different figures.


So if NPAT is 25% higher, that gives us a FY24 value of $1.125m (last year was $0.9m)

Of course, post acquisition there will be an extra 14.4m shares on issue, or let's call it ~115m in total. So that's an EPS of 0.98cps. Last year they did 0.91cps, so that's growth of 7.7%.

SGI is right that EPS growth will be 25% if you exclude the Force acquisition (about 3 weeks contribution and extra shares). Maybe it's too late on a Friday, but I'm struggling to work out what the EPS will be in FY25 based on what has been said.

Here's my thought process (someone please correct me if needed!):

  • FY24 NPAT (ex-Force) = 0.9m x 1.25 = 1.125 million
  • On a per share basis, accounting for dilution, that's 0.98c
  • FY25 EPS including the accretive impact of Force (expected to be ~26%) = 0.98 * 1.26 = 1.23 cents (this is before any new revenue contribution)
  • So that puts SGI on a forward PE (using FY25 forecast as FY24 is essentially over) of 22.5c (current market price) / 1.23c = ~18.3x

I'm just not sure if i'm interpreting what they are saying correctly...? Still, that's a higher PE than I was expecting, but if I'm understanding things right that doesn't include any organic growth from the legacy business or the new one. And you'd like to think we get some of that!

As has been noted, Mike suggested $300m in revenue by FY28. Let's assume a EBITDA margin of 6% by then (it should be 5.7% this year, compared to 4.7% last year, and they have suggested previously 8% is reasonable at more scale). That'd be a FY28 EBITDA of $18m, which is almost 3x what they should do this year.

Let's thumb suck a net margin of 3% to get a FY28 NPAT of $9m, or 7.8cps

That's certainly a lot of growth, and even if you do use a forward PE of 18, that'd be more than justified if true. But it comes down to a lot of revenue growth (around 20%pa, and continued margin expansion).

It seems possible, but the expected sales growth for FY24 isnt huge (and why is there such a range given there's only 3 weeks left in the financial year)..

Anyway, too much thinking out loud for me. I need to ponder this a lot more..

2 months ago

@Strawman thanks for picking out the key points. I've set aside time later today to watch both presentations and look at the numbers myself.

Here are further initial musings.

It is clear they these guys are massive multi-taskers, with no-one in the organisation tasked with doing QA/QC on external disclosures. (Points to a weak or over-stretched CFO, IMHO, as that's the role the MD/CEO and Board rely on to make sure all numbers are tight.) Very odd behaviour not to give the guidance update yesterday, and then to do a market sensistive announcement for a Share Cafe presentation that then gives the guidance. At least this time they flagged it as market senstive and released it before the start of the presentation.

I assume all the numbers presented exlcude transaction costs, which I expect to be in the range $0.3-$0.5m.

Secondly, I agree with the comment you and others have made about revenue growth. How credible are FY25 and FY28 targets, given the modest FY23 to FY24 movement? Surely, they are going to rely on more M&A to hit the targets? Or do they see the prospect of strong revenue synergies from the combination?

Now there is nothing wrong with acquiring scale, as long as they get good prices and pick up quality assets that are easy to integrate, while not taking on too much debt. So far, it appears, OK.

With Force valued at EV/EBITDA of 4, if $SGI is trading on an EV/EBITDA of about 8.4 at FY23, and probably around 9+ at the moment before the addition of Force, and with Force having a higher EBITDA Margin (2.5/44 or 6%, which is better than %SGI at 3%'ish), then Force is a better quality business and it shouldn't dilute the $SGI ratios ---- classic roll-up mechanics).

On revenue synergies, I can see how part of the Force product portfolio will cross-sell nicely into the Stealth Business & Trade customers, and how the Stealth product portfolio will cross sell nicely into the Force Business and Trade customer base. Not clear how much of the Stealth portfolio will sell into the Retailer and Retail Resellers. However, overall, its seems reasonable that they will get "1+1>2" on the revenue side over time, strenthening organic growth in the next 1-2 years. How much? No idea. But it could be a nice little kicker if revenue growth in the underlying business is only 2-5%.

I am curious to see that the revenue growth of 2-5% has flowed through to +25% on EBITDA, NPBT and NPAT, although I recall that EBITDA margins on incremental sales are 15% (1HFY24/1HFY23) ... the maths will be easy enough to check.

So, overall, I think the deal stacks up. Ultimately, it will be good to see proper audited numbers at the FY, and then track progress through FY25. Hopefully, $SGI will report the contribution of each of the businesses separately, both proforma for full year, and the contribution to the FY24 result.

On first inspection, I feel happy enough to continue to ride this bus, but will have a look at the P/E of the combination.


2 months ago

Like you @Strawman I came away from todays ShareCafe presentation with more questions than I had before it. Like @mikebrisy I am going to sit tight until the FY24 results are out, resting on my faith in management based on the good execution to date and insider interest in getting it right. 

In general, the deal makes sense from a management and strategy fit with the price also seeming reasonable. Not sure why the owners of Force couldn’t have an escrow – if they are so keen on holding long term like Mike said, then what's the issue with having an escrow period?

I must say when I saw that slide @Strawman posted during the presentation I became very confused and wish they had just used the same presentation (with dodgy charts) from the day before…

The only way I square the circle on the +25% up for EBITDA, NPBT and NPAT FY25 Vs FY23, is if I read it as “25% plus” growth (so at least) – which does make sense but is sure doesn’t read like that! note the figures are based on April month actual with May and June forecast, no idea what the prior day figures were based on.

I dare not ask for clarification for fear of getting a new set of graphs and figures that add to my confusion.

Disc: I own RL+SM


2 months ago

@Tom73 I've just listened to both presentations, and there is a bit of further detail gained.

Mike explained the Stealth-to-retail synergy and I get it. Its not about selling the Stealth range through the retail channel, but selling the industrial range for employees of the retail companies - which include some big companies with a LOT of employees. So I get it. Not sure how big it is, but I really like the clarity in his articulation.

On FY24 guidance for $SGI, he said "our profitability will be greater than 25%", which I took to mean y-o-y NPAT growth of >25%. Regarding EBITDA Growth, he said that would be "more towards 35% growth". So, with slightly higher D&A and high interest costs you get NPAT growth lower than EBITDA.

Mike again referred to the +$60m organic revenue growth opportunity that he has spoken about on several occasions over the last 12m, but which we can see no sign of in the FY23/F4 revenue comparison. He stated the following ... I'm paraphrasing from the transcript:

"we've been really clear and consistent for five and a half years that we have a strategy that is organic and inorganic. There's $60 million of organic opportunity that we're currently working on and we're looking for most of that to drop into the 2025 period. We have a growth strategy over the three years to get to 300 million in sales and that's a combination of organic and inorganic growth. Every acquisition we've done has 3-4x [EBITDA] multiples. Our peers are buying companies between 6-9x. So we're disciplined about the way we go about our acquisition. We don't load up our balance sheet. We also make sure that obviously it's the right strategic fit and its our operating model. So it makes sense in the current environment for us to be able to consolidate where can."

Music to my ears.

They've been looking at that opportunity for a while, and for him to say today that they expect "most of it to drop in the 2025 period" means he must still be pretty confident about it.

Looking at what he said literally, "most of it" means >$30m. And 2025 spans FY25 and FY26. So he still believes they will - at minimum get $15m organic revenue growth from Stealth in each of FY25 and FY26. So that was reassuring.

I also gained some insights into the low FY23/FY24 revenue growth story. There are two comments Mike made.

  1. They have been "right-sizing" and "focusing on proftability" - which says that they have been managing the portfolio of products and customers to focus on higher margins.
  2. He referred to the business environment, highlighting that some competitors were not growing at all, but $SGI still is.

Point 1 is important, because if I look at 2-5% revenue growth on $111m FY23 Revenue, that's +$2.2-$5.55m incremental revenue. Now, with incremental revenue attracting a 15% EBITDA margin, that's incremental EBITDA of $0.33-0.83m, or EBITDA growth of 10% (0.33/3.303) to 25% (0.83/3.303). If expected EBITDA growth is closer to +35%, to me this implies that they've lost some of the revenue that has a thin EBITDA margin, and added even more revenue at higher EBITDA margin. I really like that - a management team that is focused on margin growth and not revenue growth.

As he made these remarks, I recalled that he has made both of those comments before. So he is being very consistent.

There was also a bit of detail about identified cost and revenue synergies, but as the cocktail hour has arrived, and I am already on my second glass of wine, its time to sign off for the week. The model and eps estimates can wait until Monday.

Although Mike's delivery is not polished, there is a lot of content in it - moreso today than yesterday. But what struck me is his confidence that his management team knows this business, and that the current management team are aligned. I know investors would like an escrow arragement, and the thought of 12% of shares in this relatively illiquid stock being in play might be scarey. But actually, I respect his confidence in the management of the acquired business, and even if he is wrong I can look through that (after all it would only be a transient issue) and am convinced there is a fit here.

I find every time I listen to Mike, my first reaction is to be puzzled and even concerned at the unpolished delivery and looseness of some of the content. But then, on going through in detail, there is a lot of substance there that you can easily miss. This is a guy who really knows his business, is the sense I get.

Finally, both on the call yesterday and today's Share Cafe, I observed that he has been studying David Williams at $PNV ... bringing products to the presentation and waving them around!

Happy weekend, all.


2 months ago

Really appreciate these notes @mikebrisy, and on a Friday night no less!

And agree on the idea of an escrow @Tom73

Will see if Mike's keen for another chat with us.


a month ago

Some of the discrepancies in the original presentation and then the Share Cafe presentation were doing my head in, so I've had a go at building my own Proforma model and projecting out to FY25 and FY26, alebit ignoring the $200m and $300m revenue targets, because I don't understand the inorganic/organic mix - which matters because of dilution.

The full sheet with assmptions is provided below - so anyone who wants can critique it, and point out my obvious errors, please go ahead.

The method I've followed is:

  1. Start with $SGI FY23 Stat Accounts
  2. Add reported FY23 numbers for Force
  3. Add "sensible" estimates for missing parts of the Force P&L to yield the statement by Mike that the deal is 43% EPS accretive for FY24 Proforma before transaction costs. This yields Pro Forma FY24 P/E of 17.3 without transaction costs, and P/E of 20.3 with transaction costs assumed by me at $0.3m (3% of deal value)
  4. Add the guidance for $SGI from the Share Cafe presentation
  5. In the FY25 and FY26 columns I have detailed out the capture of 1) portions of the $60m Stealth organic growth opportunity 2) cost synergies per Mike and 3) revenue cross sell per Mike.
  6. D&A has been scaled with revenue
  7. I've scaled the FY24 ProForma interest charge with revenue, as interest is driven by inventory, which scales with revenue. Over time, falling interest rates will reduce this, however, paying a dividend may result in some ongoing LT debt on the balance sheet.
  8. At constant SOI that then yields the EPS, which at constant SP of $0.225 shows how the P/E falls rapidly over FY25 and FY26.
  9. I have then created the little table on the right showing the FY26 valuation discounted back to FY24 under 4 P/E scenarios.

The model shows why Mike wants to incentivise the Force owners to grow EBITDA (I've not included the payment to them at the end of FY26). That would appear on the P&L as D&A from FY27 onwards. If they get all of the $2.3m margin synergies attributed to Force, then that's $11.5m cash, but some of it will be attributable to $SGI, and no doubt the acquistion agreement makes clear how that will work.

Its basically an incentive to the current Force owners to sell the $SGI range to the worforces of Force's current customers. As they have the relationships, its something to keep them busy, while Mike integrates the Force supply chain into Stealth.

Force is a higher margin business. $44 million revenue with 44 staff, versus c.200 people at Stealth for only $111m revenue. Mike's already said that every incremental $ of revenue at $SGI has a 15% EBITDA margin. Well, every $ of incremental revenue from the Force portfolio drives 30% EBITDA margin. So, the cross-sell should be very profitable, if they can get it.

What's conceptually so good about this deal, is that all the projections below are achieved without needing new customers, or growing revenue beyond the identified $60m organic $SGI opportunity (of which I only assume $30m is captured by end of FY26) and the Force-SGI cross-sell. According to Mike, the potential exists within the network today.

Of course, this assumes that adding a bunch of retail products for retailers, resellers and online, doesn't result in a loss of focus from %SGI core industrial and trade business. That's one key unknown.

So the analysis perhaps gives some clues as to why Mike was encouraging viewers of the Share Cafe presentation to "load up, the shares are cheap".

If "Stealth-Force" can execute within the parameters as set out by Mike, then he's probably right by my calculations.

Figure 1 ANALYSIS: (Excludes potential future payment in FY26 to Force Owners, which will not hit the P&L immediately as it will be CAPEX.)


If $SGI starts to generate stable earnings, then looking at other ASX distributors, it would certainly justify a P/E>10.

$SGI is a true microcap, and its progress over the last year has seen it rise to 3% of my RL-ASX portfolio. The SP is pretty volatile driven by illiquidity and, with this kind of potential upside - even if my projections aren't quite right - then it perhaps warrants a somwhat higher exposure in the portfolio, even purely on the logic of reallocating some of the capital held in less promising positions. I will add some more on weakness.

Disc: Held in RL and SM


a month ago

Great analysis @mikebrisy, I wish I had the same clarity of thought and presentation. Thank you for sharing.

I will update my valuation when FY24 results are out because I see no need before then because I sense checked it to yours + Force and its very close. Comparing:

FY26 Sales of 148m (no Force) Vs 197m (Force adds at least +49m)

FY26 EBITDA of 10.8m (no Force) Vs 17.5m (Force adds +2.5m and Synergy +3.9m)

FY26 PBT 6.1m (no Force) Vs 8.0m (-2.4m is for additional Force Depreciation, -2.2m in additional interest costs offset by 6.4m Force & Synergy benefit)

FY26 EPS of 4.3c (no Force) Vs 4.6c (Force accretive 0.3cps)

I am comfortable that Force will be accretive on a per share basis at around what @mikebrisy assume, but even if it is flat, provided the SGI business continues to perform in line with guidance both valuations have assumed lower sales and EBITDA outcomes than guidance and have a much higher value at low PE’s than the current share price.

Disc: I own RL+SM