Stealth Group Holdings Ltd

ASX:SGI

Stealth Group Holdings Ltd

ASX:SGI
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$0.450 (0%)
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Forum Topics SGI SGI Force Acquisition

Pinned straw:
DrPete
Added 5 months ago

I just want to give a huge thanks to @mikebrisy, @Tom73 and @Strawman for your recent thoughts on Stealth's acquisition.

Sorry for going quiet on Strawman in the last year. After selling my tech/consulting business early 2023 I'm working through my earn out period. It's all gone pretty smoothly. But now that I'm "working for the man" I have a lot less flexibility with my workload during the week. I'll be back (said with an Arnie accent).

My quick take on Stealth's acquisition aligns with comments here on SM. My concerns: uncertainty about strategic fit (and Mike calling Stealth a "diversified conglomerate" didn't help); slow organic FY24 growth well below 10% expectations set by Mike; delay in the start of the additional $60m from bulk distribution model; continued glacial progress on profitability.

The positives: I can see how 1 + 1 might be a bit more than 2; all profitability and efficiency metrics continue to move in the right direction; only a small $ increase in NPAT is needed for PE to plummet; a modest dividend is on the way (I personally don't need the dividend, but it could be a catalyst for widening the shareholder pool).

I'm largely on track with @mikebrisy's valuation, although I'd use a more conservative discount rate of 20% given microcap status and current razor thin margin. Still, that puts a valuation somewhere around $0.30+ using a very conservative discount rate. Like everyone else, before I draw too many conclusions I'll wait a couple of months for FY24 report.
mikebrisy
Added 5 months ago

@DrPete Welcome back. I know what you mean about the demands of a day job. I've just finished a couple of weeks work away from investing, and found it a challenge to keep up with everything. Hence, spending a little weekend time catching up.

I do see the lack of net organic growth as a potential area of concern. I don't know why the $60m organic opportunity is still in the "to do" list. If they don't start marking progress on it soon, It will lose credibility, as it is the kind of thing they can and should be getting after. Mike will need to explain why, if it is still in the "to do" bucket at the FY, even though it is not in my numbers for FY24. For now, I've accepted Mike's explanation that they've let more low margin business go to focus on profit growth which offsets the higher margin organic growth, and that's why I used the term "Net organic growth" (this makes sense looking at all the numbers).

I was also irked by the "conglomerate" term, but I put this down to Mike's lack of broader awareness of the investment world. Another example was the cringeworthy reference to Macquarie upgrading JBHiFI to a "buy" as evidence of the strength of $JBH as a customer. It hinted to me a rushed presentation preparation as in "oh, here's a broker note on one of my customers, so I can use that to tell my investors how good my customers are."

But I'm not too worried about this, as he is a 10% owner of $SGI and has articulated enough of his strategic framework for me to be confident her won't do something dumb and that he has capital discipline.

On discounting, I tend not to use higher discount rates to capture risk (albeit I will for more speculative investments, so I'm not 100% consistent). My method is to discount at the WACC, and explicitly use scenarios to show risk-reward. For $SGI I didn't do a DCF, but just looked at the FY26 eps and discounted that back at the WACC of 10% (their relatively high net debt helps bring down the higher cost of equity of 11%-12%).

So my valuation was a "Bull" Case, and I think you are right that something more around $0.30 reflects the question mark we should all have on organic growth.

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