Stealth Group Holdings Ltd

ASX:SGI

Stealth Group Holdings Ltd

ASX:SGI
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$0.415 (-3.5%)
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Reports (5) My Report Forum Investors
Forum Topics SGI SGI SGI valuation

Pinned valuation:
mikebrisy
Added 4 months ago
Justification

5-September-2024

Valuation = $0.53

Model updated following today's webinar.

The detailed inputs and outputs are shown below. In essence the methodogy considers a wide range of scenarios for the business to be built by FY28, modelling a range of revenue growth and margin evolution scenarios.

On the Valuation Simulation graph below, I've plotted all the modelled values, with the pink rectangle showing my notional p10% - p90% range yielding a range of valuations from $0.33 up to $0.91. So pick your scenario or throw a dart!

The model assumes organic growth, although today Mike set out the assumption that 25% of the growth would come from M&A. To allow for the likely dilutive effect of future acquisitions, I've grown SOI by 5% p.a. from 2024 to 2028. So SOI in FY28 is 140 million.

And yes, I do have one scenario of c. $300m revenue and 8% EBITDA margin. However, in the lower revenue growth scenarios I find that higher EBITDA margins are very do-able! Prioritisation of margin over revenue from today should easily achieve a business with higher EBITDA margins, given the %GM and scaling of CoDB demonstrated to date.

Scenarios 3.1, 3.2, and 3,3 have the 17% revenue CAGR required to hit the FY28 $300m revenue target. However, most scenarios prioritise margin/ profitability over revenue growth, illustrating that Mike can come well short of $300m revenue and still achieve a lot of shareholder value creation. That's why I'm not bothered that the FY25 $200m target has gone by the wayside. Profit is more important!

Value per share in FY28 is discounted back at 11% (not 10% stated prior to edit).

Model retains capital light growth, scaling capex with Revenue. Working capital (incl. inventory) also scales with revenue.

Previously I modelled terminal P/Es of 8, 12 and 16. In this update, I've raised that to 10, 13, and 16. The big upside I've not modelled is that if $SGI can successfully execute this strategy, the EBITDA growth and earnings growth is going to be so high that the P/E will almost certainly be well north of 20. There is a massive premium here for successful execution. And I get a sense from today's webinar that the scale of the upside is apparent to Mike!

Of course, there is a big difference between modelling some scenarios and execution.

As ever, this is not advice and is intended for my own use only.

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** Edit to original post ... discount rate used is actually 11% (I meant to use 10%, but left 11% in by error when I was doing some sensitivity analysis! ... all that means is the value is even higher than shown, So, I'll just leave it with 11%)


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9-June-24

Valuation = $0.41

See straw for details.

Based on FY26 Proforma Project for Stealth+Force, discounted back to 2024 at a P/E = 10.

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Strawman
Added 4 months ago

Love your work @mikebrisy, this is brilliant.

Certainly seems like there's a pretty wide margin of safety here.

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mikebrisy
Added 4 months ago

@Strawman thanks! That's certainly how I see it.

I've almost held $SGI for one year - only one year. And with the recent "pop" it's become my 4th largest RL holding! I never thought I'd be saying that for a micro-cap. But because of the wide margin of safety and the clear measures to track progress, I'm going to let this one run. (I sold some earlier this week on SM to free up some capital to initiate $AIM. But I haven't sold any in RL and I don't intend to.)

I'm assuming the "pop" is because it's hit everyone's dividend filters - boy, we Aussies love our fully franked dividends!

There is a lot to like in the webinar, and I encourage all holders to view it, as well as anyone else who might be interested. Some standouts for me were seeing more of Mike's strategic thinking. Some examples:

Private Label: Mike's seen what Anko is doing for Kmart, and has a strategy to create EFM as a leading private label brand in MRO. Private label = higher margins.

Leveraging Force: Force comes with an office in Kong Kong. They're going to leverage that for the entire group to manage their private label manufacturers ("14 factories in China"), A company physical presence will be so important in making a success of private label, because they are going to have to get the design-features-variants-cost-pricepoint-volumes decisions right, time and time again, both to deliver the margin as well as to build the brand over many years. Good relationships with the manufacturers will be key.

Business Model Innovation: He's studied the Coates and Kennards business models and is implementing a few equipment hire outlets to conduct a low risk experiment. He believes there is a 13-week payback on average with the product targeting equipment items with a price tag less than $5,000. They can offer this business line leveraging existing stores (I think). The hire sector is also counter cyclical, with firms tending to hire equipment more in a high interest, macro-uncertainty environment.

Market Focus: Seeing the upcoming Apple launch, they've positioned their consumer tech product ranges. "We've got 3 quarters of our orders pre-sold. So we're expecting a super cycle as they go through in October and November."

I could go on, but there is a lot of innovation and option value. And now, with the discipline of returning capital to shareholders, every year he's going to have to make tough capital allocation decisions.

And all this for a company not yet worth $50m. I don't think you come across this often. This could "easily" be a $500m company in 5 years.,,,or another $SNL in the making...., because the market is so large and fragmented. What I don't have a handle on is how scalable the supply chain model and systems are. But I think that's a medium term question, and not one for today.

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