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.

Thanks for your updates and insights @mikebrisy, @Tom73 and @wtsimis. Sounds like a strong meeting with quite a detailed trading update from Mike. Some AGMs are dry. Mike’s openness perhaps reflects his confidence in progress and comfort in share price increase.

Stealth has now more than doubled in value for me. I built to a large position and I’m now pondering my outsized holding. I’m also contemplating @Strawman’s frequent reflection that some of his bigger regrets are decreasing holding too early. Stealth is now around the fair value that I’ve posted on Strawman for the last couple of years. That fair value was based on a discount rate of 20% that I used because of razor thin profit and illiquidity.

I’ll continue to hold. My 20% discount rate implies a forecast 20% return at current share price. The assumptions behind my valuation are starting to seem conservative with the continued positive and open updates from Mike. I’ll resist the fear, trust in the process, and continue to stay the course!

Another reflection and lesson for me with Stealth … In an odd way I’ve been lucky that Stealth has taken so long to see a significant share price increase. I started accumulating 3 years ago. I presented my stock pitch for Stealth on Strawman a couple of years ago soon after I joined in late 2021. My conviction just continued to grow with the support of all of you in the Strawman community who have debated the pros and cons of Stealth. Up until about a year ago I continued to build my holding until it was my largest holding and I wasn’t comfortable putting more in. All up it was about 3 years between first investment and significant increase in share price. Our natural desire is for price to increase as soon as we start to invest, that provides immediate validation of how smart we are. But quick price increase deprives the opportunity to steadily dollar cost average into a large holding.

So, note to future self; be content when the share price DOESN’T increase soon after you spot an opportunity, it’s better to be slowly right than quickly right.

Hope someone can attend the Stealth AGM this Fri 24 Nov 2pm? Curious to hear if Mike gives an operations update. Unfortunately I'll be travelling so can't attend.

Webcast details: https://announcements.asx.com.au/asxpdf/20231115/pdf/05xd0t6749pghm.pdf

Fun fact . . . Stealth Global Holdings will change its name to Stealth Group Holdings at next AGM. Understandable given they have divested and wound down their international operations. Sad day if your valuation was dependent upon global domination . . .

Here's a quick summary, and my reflections, from Mike's presentation at the Sharecafe small caps webinar on Fri 16 June. Big picture, not a lot has changed. There were some confirmations, some positives, but also some likely misses on the way.

• Targets: Mike reiterated his belief Stealth can achieve $200m+ revenue and 8%+ EBITDA in 2025 (to be conservative I assume CY25 not FY25).

• Profit: The bet on Stealth is all about margin growth. Even a small margin growth will make the share price look cheap. My thesis has been that Stealth will achieve at least $1.5m NPAT in FY23 and 3%+ NPAT within 5 years. Mike discussed expectation of additional $1m+ in profitability this year, and one of the slides stated "Net profit expected to exceed FY2022 result" (FY22 statutory NPAT was $0.6m). At the time of announcing the H1FY23 result of $0.3m NPAT Mike said H2 profit will be higher. It sounds like that may still be the case. In which case my thesis of a minimum of $1.5m NPAT for FY23 is still in play.

• Revenue: Here was some disappointing news. My thesis has been at least $115m in FY23. However, Mike gave guidance of $107m-$112m revenue for FY23. Given pro rata revenue (taking into account acquisitions) for FY22 was $108m, that's little or no growth for FY23. In previous comms Mike reported $2m loss of revenue from closure of unprofitable stores. If I'm trying to be generous, maybe some more of that rationalisation happened in FY23 which has not been communicated? To Mike's credit he has consistently shown a willingness to drop unprofitable revenue. Nevertheless, revenue for FY23 will miss Mike's previous comms. In discussing FY22 results Mike communicated "$120m+ consolidated revenue run-rate for 2023." That won't be achieved. Mike has also repeatedly talked about "inflationary tailwinds", and how Stealth's products are non-discretionary. But FY23 revenue will be going backwards compared to inflation. And there is a growing disconnect between current revenue and Mike's consistent communication of $200m+ revenue for 2025 - this would require 27% CAGR over the next 2.5 years, it is hard to see that happening. It would be great if Mike could provide investors with some insights into the revenue challenges.

• Supply chain consolidation: One possible path to achieving $200m+ is through capturing a significantly greater share of the procurement of the independent stores in Stealth's network. Mike said the independent stores spend $160m annually directly with product manufacturers, of which Mike believes Stealth could capture $80m spent with a small number of manufacturers by becoming a bulk purchaser and distributor. I'm not clear how realistic this goal is, and Mike didn't provide a timeframe. If it can work, it is a very big chunk of new revenue. We'll have to wait and see.

• Pricing: Mike has previously talked about how Stealth's products are non-discretionary and that Stealth was undertaking a "price reset" in response to inflation. However it is not clear if this has occurred. If it has, then volume must have dropped given revenue has lagged inflation. If it hasn't occurred, it suggests Stealth doesn't have strong pricing power. I have personally raised the question to Mike about whether the price reset has occurred, but I was told that information is confidential market-sensitive information.

• Headcount reduction: In regard to cost containment, Mike explained that headcount had reduced from 249 to 219 through natural attrition. This reduction may explain some or most of the $1m+ additional profitability Mike mentioned. Mike suggested this reduction won't have a negative impact on processes and service quality.

• Dividend: Curiously, given it was a prominent announcement in Mike's previously couple of comms, Mike did not mention the possibility of a dividend in FY24. I won't jump to conclusions, but given the purpose of this presentation was to attract new investors, it's a surprising omission if it is still planned.

• Debt: But Mike did reiterate that Stealth will repay its acquisition-related debt in FY24. It was this repayment that provided the grounds for a future dividend. So I'll assume the dividend is still planned. As a reminder, Mike has previously said the dividend will be 30-40% of FCF at the end of FY24.

In summary, investors need to be prepared for less exciting revenue growth stats coming our way. The reason for lack of growth is unclear. I have asked Mike but he declined to provide an explanation on the grounds of it being market sensitive information. So be it, I'll interpret this as him playing a straight bat and not wanting to give one shareholder an edge over others. Perhaps he'll be more willing to publicly provide some insights to shareholders at the next AGM.

But ultimately Stealth's valuation rests on margins, and my thesis here can still be achieved. If Stealth can steadily work towards >3% NPAT over the next couple of years, even with slow revenue growth, then a market cap of $12m would be an extremely low PE of around 3. I'm looking for $1.5m NPAT in FY23 as evidence that Stealth is moving in the right direction. If so, then it's easy to make a case for a valuation of 3x current price.

Stealth is giving a small caps investors presentation today. Not expecting much new but Mike may give a trading update. I'll attend and report back if anything interesting:

https://stealthgi.com/wp-content/uploads/2023/06/2565120.pdf

I'm still high conviction on Stealth because I think there is so much margin of safety.

BUT investors need to be prepared for mid single digit growth for FY23. The latest announcement was a little behind my expectations.

The recent announcement of record quarterly and 9-month revenue is largely on the back of acquisitions rather than organic growth. Stealth's pro rata revenue for FY22, taking into account acquisitions and divestments was about $108m. During this year they announced they closed 2 unprofitable stores with about $2m in revenue, so let's say the base for comparison is $106m.

Given they are $82m for the first 9 months, and assuming around $30m for Q4 (they did $29m in Q3), we're looking at around $112m for FY23, which would be growth of around $6m and 6%. This is below Mike's consistent communication of 10% organic growth.

My thesis was for FY23 revenue of $115, so not a big miss, but still a miss.

Still, as many of us have said, the magic for Stealth will be in growing the margin. Revenue growth is nice, but margin growth is critical. The quarterly update didn't give us any info on margin. I won't over-interpret the lack of info on margin because Mike has been (very) slowly improving the margin, and the consistent quarterly debt repayment of $400k (without taking on more debt) and the bold guidance of dividend by end of FY24, give me confidence margins will continue to improve.

I won't revise my valuation on SM based on limited quarterly update. Overall I'm still very bullish, just a little more cautious. But to highlight the enormous margin of safety that is in the current share price, even if I assume only 6% CAGR over the next 4+ years, if they can get to just 3% NPAT (Mike has consistently communicated 8%+ EBITDA by 2025, and Grainger in the US is 12%+), even with a PE of only 10, we're looking at market cap of $43m in FY27, compared to current $11m, which would still be a 30% pa return, plus any dividends along the way.

Late notice, but Stealth is holding a “strategy briefing and product showcase day” this Wed 3 May in Sydney, 12:30 at the Hyatt Regency. Unfortunately I’m on hols in Port Macquarie so can’t make it but would be great to get some feedback from some Strawpeople:

https://stealthgi.com/wp-content/uploads/2023/04/2545778.pdf

OK, I've had a chance to dive into Stealth's half year results. Overall I'm comforted. Largely on track with previous expectations set by Mike. And also aligned with my previously stated thesis/milestones I set for Stealth. Here are my thoughts, and I'll updated valuation separately (which is only slightly increased to $0.24 using a very conservative discount rate of 20%, suggesting 38% pa ROI over next 5 years).

Good:

- Essentially on track with previous expectations set by CEO Mike Arnold, no big surprises

- On track with my thesis (see my #Valuation straw from Sep '22, where I stated expectations for FY23: rev $115m, NPAT $1.5, net debt:EBITDA <= 3x, no capital raise)

- Revenue up 18% on pcp, which in turn was 46% up on pcp, so growth isn't an artefact of a bad pcp.

- EBITDA, NPAT, FCF all grew modestly

- Net debt to EBITDA fell

- Staffing costs, operating costs, inventories all fell as a proportion of revenue 

- Communicated expectation of $200m rev and 8%+ EBITDA in 2025 (I'm assuming CY25), which would be 23% pa growth

- Stunningly communicated expectation of dividend end of FY24 at 30-40% of FCF which could be around 5% yield based on current share price

Bad:

- Organic growth only about 5% after removing acquisition-based growth

- Revenue down 5% on last half year

- Hard to reconcile communication of expected 23% CAGR over next 3 years with 5% organic growth on pcp, and 5% revenue decline since last half

- NPAT razor thin at 0.3%

- Setting expectation for a dividend more than a year away is either gutsy or desperate. Either way it is risky

Risks:

- Margin: In previous comms Mike said margin wouldn't go up much in H1FY23; it did modestly but is very thin. But he did previously say that profitability will be clearly higher in H2FY23, so there is an expectation set that there will be a step-change in margins this half. We will see.

- Dilution: I'm still wary of Mike's past communication of possibility of "inside or outside investment" to fund attractive acquisition or investment opportunities. Recent 5% organic growth is a long way from communicated expectation of 23% CAGR, so does Mike's forecast assume further acquisitions? My valuation assumes 20-30% dilution over the next 5 years, but I hope that occurs in the medium term with share price at $0.20+. But I fear that if a cap raise occurs in the near future the share price may get hammered given the current low share price and a ruthless market that seems to dump on any sniff of bad news 

Thesis for FY23 (unchanged from the thesis I gave in Sep '22):

- Rev $115m

- NPAT $1.5

- Net debt:EBITDA <= 3x

- No capital raise with share price <$0.20

Detailed working notes (sorry if not self-explanatory):

1. Revenue up 18% on pcp, $52.4m

a. Increase on pcp seems NOT a Covid artefact given H1FY22 was 46% growth on H1FY21 (which was the Covid trough for Stealth)

b. But H1FY23 revenue doesn’t compare well with H2FY22 which was $55.3, so 5% decline on last half

c. Impact of acquisitions?

i. Skipper on board from 15 Aug 21 (annual revenue of $18m, so roughly $2m of growth from Skipper for 1.5 months of unrecognised revenue), United Tools from 1 Mar 22 ($8m rev, so $4m of growth from United Tools for 6 months of unrecognised revenue)

ii. So roughly $6m out of $8m growth from acquisitions, suggesting just $2m/$44m = 5% organic growth

2. Revenue and gross profit grew faster than staff, other operating expenses and inventories, showing operating leverage with growth

3. Statutory EBITDA, NPAT, FCF showed steady growth to $2.2m, $0.3m and $1.2m for the half (adjusted FCF downward for equipment & intangible asset purchases).

a. Mike had previously communicated that there would be higher costs associated with strategic investments and acquisition consolidation in 1H23. Based on Mike's guidance, expectations are $6m EBITDA and $1.5m NPAT for FY23.

4. Gross profit margin dipped marginally for the first time to 29% compared to previous 30%, but still at a much improved margin compared to previous years (up from 18% a few years ago)

5. Cash increased marginally to $5.1m

6. Net debt largely unchanged over last half year at $10m

a. Net debt to EBITDA reduced from 3.1x to 2.1x

b. "Borrowing due within 1 year" $11.6m (p 20 of full report)?? Is this debt that has to be rolled over? Is this a risk?

7. EBITDA to NPAT calculation

a. Depreciation about $1.5m per half, $3m per year

b. Interest costs were $0.5m in H1FY23, assume perhaps $0.7m in H2 given increased interest rates, so perhaps $1.2m for FY23

8. $1m in income tax received? A refund? This provided an unsustainable boost to FCF.

9. Reaffirmed estimate of $200m for 2025.

a. That's an optimistic growth trajectory from $108m in last 12 months. Assuming the $200m is C25, that’s 23% pa growth. Milestones would be $60m in H2FY23 (=$112m for FY23) and $73m in H1FY24.

10. Reaffirmed estimate of 8%+ for 2025.

11. Stunning announcement is plan for dividend end of FY24, 30-40% payout of FCF. Timing is aligned with repayment of acquisition debt facility, for which $1.6m is being repaid per annum

a. Assuming modest FCF of $2m in FY24, 30% x $2m = $0.6m, about 5% franked yield on current share price. 

Half year financials released by Stealth. On first quick read they look strong. Hope to get an opportunity to dive into detail this weekend. Here's the link: https://stealthgi.com/investors/asx-announcements/. Quick details:

1. Revenue up 18% on pcp.
2. Free cash flow for 1H FY23 $1.2m. Converting to statutory NPAT of $0.3m.
3. Some debt paid down.
4. Reaffirming guidance of $200m rev and +8% EBITDA in 2025 (assume C25).
5. Strikingly, they are so confident on ongoing cash flow they announced plan for dividend, at 30-40% payout ratio, end of FY24.

Positive trading update from Stealth: https://www.asx.com.au/asxpdf/20221116/pdf/45hn9xy3j44nxp.pdf

• $36m revenue for Jul-Oct (4 months) suggesting Stealth is on track for predicted 15-20% growth for FY23 to $115m to $120m revenue.
• Recent new contracts adding further $6.6m per year for next 2 years.
• Internal rationalisation of operations expected to deliver additional $2.2m in CY23 (not clear what "profit" statistic is being used, so perhaps assume EBITDA with perhaps half of this flowing through to NPAT).
• Inventory rationalisation will reduce inventory by $1.3m.
• The update says outlook is positive with organic growth, positive contribution of recent acquisitions, and "expects to benefit from inflation tailwinds".

Share price has had a bump over last week or so, up from $0.11, now currently at $0.135. But still need a thick skin - illiquid so small trades create volatility.

AGM is this Fri if you're interested. Webcast details here: https://www.asx.com.au/asxpdf/20221111/pdf/45hhlkn9rn59v0.pdf

Here's my revised valuation after researching Stealth's FY22 financials, watching the CEO Mike Arnold's recent investor webinar, and some personal Q&A directly with Mike.

Summary: Share valuation of $0.22, using a very conservative discount rate of 20%. At current share price of $0.12, I forecast an ROI of 35% pa.

For the long version . . .

For details about Stealth's FY22 financials, see other recent straws on Stealth by @wtsimis and me for details. But here are the big themes that feed into my valuation:

1. Mike's communication about future growth has become more restrained. Instead of past communications saying 25% pa growth encompassing organic and acquisitions, he's now saying 10% organic growth plus acquisition. The difference may be the constraint on future acquisitions he is facing because of Stealth's current low share price and high net debt. So I've pulled back my assumptions about growth. My base case takes the conservative approach of assuming only 10% CAGR over next 5 years.

2. In addition to the 8%+ EBITDA goal for FY25 that Mike has communicated frequently (I suspect this will be "underlying" by the time we get there), he communicated to me that NPAT of 3-4% (again, I'll assume "underlying") for FY25 was quite possible. My base case valuation takes a more conservative assumption of achieving statutory NPAT of 3% in FY27.

3. Mike has been clear about his drive for solid cash generation, starting 2H23, and his intention to use the cash for acquisitions and/or reduce debt, and start paying dividends around 2025. My base case valuation assumes a dividend payout ratio of 20% in FY27.

4. Mike's recent investor webinar raised the spectre of future capital raising and dilution. To-date Mike and Stealth have shown strong capital management. But he has continued to talk about future acquisitions and explained that if debt was a constraint he would consider "inside and outside investment" to fund acquisitions, by which I assume this means either institutional or public capital raising. This feels like he is opening the door a little more to capital raising even if the share price is low. However, given the very low share price, even a small $3m raise would be a 20% dilution for current shareholders. So I'm factoring in 20% dilution over the next 5 years into my base case valuation. 

5. Finally, if you noted my previous valuation, it might seem like my current share price valuation is a big drop. But it's mainly because I'm now applying a much more conservative discount rate. I'd previously used 10%, but as an investor in Stealth I'm going to apply a conservative 20% discount rate to compensate for risks associated with liquidity, debt, dilution and not yet having growing or healthy free cash flow. 

Scenarios

For my valuation, I compiled and assigned probabilities to 5 scenarios (blue sky, bull, base, bear and bust). I also looked at a "backwards" valuation, fleshing out what the market seems to assume will happen based on current share price. I've detailed my base and backwards valuations below, and you can have a look at the attached pdf for the full set of valuations.

Stealth SGI Scenarios 220917.pdf

Base: 30% probability, FY27 financials: 10% 5-yr CAGR, 20% dilution of shares, rev of $161m, NPAT of 3% = $5m with 20% payout ratio, PE of 12, market cap of $58m, 5-yr ROI 32% pa.

Backwards: FY27 financials: 5% 5-yr CAGR, 30% dilution of shares, rev of $128m, NPAT of 2% = $3m with 0% payout ratio, PE of 10, market cap of $21m, 5-yr ROI 10% pa.

Fighting against the risk of investors' optimism, I believe I've taken several conservative assumptions in my valuations. My base case uses revenue and profitability figures lower than communicated by Mike. It assumes a large 20% dilution of shares even though no dilution has been confirmed by Mike. And I've used a terminal PE well below historical averages and much lower than would be typical for the growth and profitability figures I have used. And with my probabilities I've weighed the bear and bust cases slightly higher than the bull and blue sky cases.

Despite all that, the risk adjusted valuation aggregating across all scenarios suggests an ROI of 35% pa over the next 5 years.

Coming from the opposite end, the current share price suggests a scenario of only 5% 5-yr CAGR (super conservative given there is already strong evidence that FY23 will see 15-20% growth), 30% dilution of shares, NPAT only getting to 2% in 5 years' time, no dividends and a PE of only 10. That's a pretty bleak scenario, one that I think is highly unlikely. But if even all of that happened investors would still get 10% annual return.

Risks

1. Statutory margins. Like too many companies, Stealth has a habit of focusing on "underlying" margins which are often a long way from what ends up benefitting shareholders. Stealth has perhaps had more reason to do so given the large number of recent acquisitions. But other expenses such as investment in IT and store refurbishments have been excluded from reported underlying margins which I believe should more honestly be accepted as normal business expenses. Stealth's statutory NPAT is only marginally positive and was unchanged from FY21 to FY22. Stealth will always have thin margins, so expense management during volatile trading conditions is critical. It is understandable that investors do not yet have strong confidence in future sustainable profitability.

2. Debt. Stealth's net debt of $10m is very high for a company with market cap of $12m, but is a lot more reasonable when Stealth is viewed as a company of $100m revenue and $6m EBITDA. Still, given Mike has said the company continues to look for acquisitions, there is a risk that the company draws further debt at a time of increasing interest rates. To date, however, Mike has shown sensible use of debt given it has been cheap and has stated that he will not exceed a ratio of net debt to EBITDA of 3x.

3. Dilution. Similar to my debt concerns, Stealth may resort to funding acquisitions through capital raising. Given the very low share price, even a small capital raising in the near future will substantially dilute existing shareholders. To date, Mike has avoided capital raising, explicitly saying that with the low share price he didn't want to punish early shareholders. But for the first time, in the recent investor webinar he explicitly mentioned the possibility of "inside or outside investment" to fund future acquisitions. Time will tell if Stealth maintains its discipline of selecting and funding acquisitions only in clearly value-adding ways.

4. Liquidity. There are days when no Stealth shares are traded, and other days when $500 of trading shifts the share price by 10%. The low analyst coverage of Stealth is a double-edged sword. It means there is potentially amazing value to be found, but it also means that investors need to wade in very slowly (or meaningfully drive up the price), and at this stage can't get out quickly (unless you sell at heavy discount). Investing in Stealth requires patience, comfort with seeing the share price jump around by large amounts on small trades, and acceptance it is a multi-year adventure. Think of Stealth as a 3-5 year term deposit that you need to drip feed into, but which is, I believe, likely to deliver a 30%+ pa return. Once some consistent healthy profitability has been delivered over the next couple of years, liquidity should improve.

Summary

I continue to be high conviction bullish with Stealth. So long as you're patient, I can't see much downside, the current share price assumes a pretty bleak future that I believe is very unlikely, and if just a few things go right Stealth could be a 5 or 10 bagger in 5 years.

Here are the milestones my valuation assumes, and against which I'll test my thesis over the next 12 months:

1. FY23 revenue of $115m, which will be 15% growth over FY22.

2. FY23 statutory NPAT of $1.5m (excluding any acquisition costs if acquisitions occur in FY23), which will be a $0.9m (or 150%) improvement on the $0.6m in FY21 and FY22. Mike has guided that 1H23 will be focused on acquisition consolidation whereas 2H23 will be focused on cash generation. Hence, much or all of this NPAT will be delivered in 2H23.

3. Mike keeps to his stated limit of net debt to EBITDA of 3x.

4. Mike does not raise capital with share price below $0.20 (or it needs to be an exceptional value acquisition to justify a capital raise). 

Stealth is holding an investor presentation this Thu 15 Sep to discuss FY22 results and outlook:

https://stealthgi.com/wp-content/uploads/2022/09/2433779.pdf

Here are my notes from reading through Stealth's financial report and investor presentation. The notes are probably not sorted ideally, and maybe not completely self-explanatory, but thought they still might provide SM members some insight.

• 46% revenue growth to $102m, essentially as the CEO has guided over the last year. It has been a big year of acquisitions plus organic growth. Stealth is now much larger, more diverse, more balanced (products, customers, regional presence) but also more complex.
• FY22 acquisitions:
• Skipper Transport Parts Aug '21, $14.5m rev in 10.5 months
• Divestment of Bisley Jan '22, receiving $2m for sale
• United Tools Mar '22, $4.3m rev in 4 mths
• United Tools Albany Store May '21, $0.25m rev in 2 months
• The financials look a little more complicated than they need to because of the small divestment of Bisley in the UK which generated $2m in income. Thankfully this Bisley complication won't be there in future accounts. At times the results refer to "consolidated" (which includes Bisley, and are best used for historical comparisons) and "ongoing" (which excludes Bisley, and are perhaps a better baseline for future comparisons). However, looking at the big picture, conclusions from the consolidated vs ongoing results are essentially the same.
• Acquisitions contributed $19m of revenue. The acquired businesses had pro rata $27m full year revenues, so $8m in revenue from those business was not recognised in Stealth's financials in FY22. So pro rata revenue for Stealth (ie, including full year revenue for acquired businesses) was $110m.
• Regarding acquisitions: "Full benefits . . . yet to fully materialise. Expected over next 24 months."
• 30% gross profit, up from 29% FY21, 19% FY18.
• Investment costs were $1.4m including store refurbishments, new premises, technology systems and $0.9m in acquisition costs.
• $7.5m available cash ($4.7m cash on hand + $2.8m undrawn working capital facilities)
• Net debt (short and long term debt - cash) = $10m
• Operating cash flow of $0.9m
• "Underlying" EBITDA from consolidated operation $6.7m, up from $2.9m, but statutory NPAT to members stable at $0.6m, and EPS stable at $0.006 per share.
• Acknowledging the low NPAT/EPS: "Increase in net profit has not translated due to reinvestment . . . Post integrations and launch of renewed operating model in 1H23, we have specific focus in 2H23 on driving up our profitability."
• So how does $6.7m in "underlying" EBITDA from consolidated operations translate into $0.6m in statutory NPAT? It goes something like this:
• -$0.9m acquisition costs
• -$0.5m other growth-related investment costs
• -$2.6m depreciation
• -$0.7m interest
• -$0.3m tax
• -$1.1m adjustment for Bisley divestment
• =$0.6m statutory NPAT
• Online sales up only slightly at $2.4m compared to $2.2m. This small improvement over a tiny base seems disappointing, although no specific goal was set for online sales.
• They note Stealth is on a "$120m+ consolidated revenue run-rate for 2023."
• I assume this refers to FY23, which equates with other stats suggesting current pro rata revenue for FY22 was $110m (see point above), less $2m for Bisley divestment, plus reconfirmed expectation of 10% organic growth.
• I think this is a conservative guide given:
• It assumes no synergies from past acquisitions
• Stealth has previously communicated $18m in recent new contracts that will materialise over next 18 months
• It assumes no future acquisitions despite Stealth making it clear in its reports that acquisitions are still on the radar
• This guide of $120m+ aligns with previous guide of 25% growth for FY23.
• "Our target to 2025 is 8% EBITDA. We would like to see a 5% net profit longer term." I assume this refers to 5% NPAT given he has mentioned that goal in a previous presentation.
• The stated goal is to pay dividends by 2025.
• 1H23 strategic focus: Consolidate acquisitions and invest for growth
• 2H23 strategic focus:
• Improving profitability
• Stronger cash generation, in part through lower inventory levels
• Some other incidental stats:
• 16% of staff impacted by Covid in July '23
• 39% of workforce are women, which seems reasonable for what is stereotypically seen as a male dominated industry
• The CEO Mike Arnold's pay in FY22 was $594k, up from $518k in FY21 (a not unreasonable increase for a company that grew 46%). Mike did NOT receive performance bonuses because hurdles for EPS growth and share price were not met.

Hope that helps. I've fired off a few questions to Mike. When I hear back I'll post any updates here.

And when I hear from Mike I'll update my valuation. Unless I get any surprises from Mike, I'm still high conviction bullish. Even if I use conservative assumptions (which are below what Mike has communicated) such as 20% growth in FY23 (feels like that's a minimum given points above), dropping to 10% for FY24-27, we get FY27 revenue of $176m. Assuming FY27 NPAT of just 3%, and a conservative PE of 12, we get a FY27 market cap of $63m compared to today's $12.5m which would be a 4-bagger in 5 years. Allowing for 10% dilution along the way, that's an ROI of 36% pa. Things could of course go worse, but they could also go a lot better.

I won't repeat the good summary by @wtsimis. Overall the FY22 financials were solid and broadly on plan. I haven't dug into the details, but big picture Stealth was profitable by all measures. Strong improvements in EBITDA, although these get eaten up a bit with acquisition and investment costs. And the divestment of Bisley complicates the numbers. But we can confidently say Stealth has small and growing profit margins.

A question/concern I have is that they have dropped their messaging of 25% pa growth which they argued would arise from 10% organic growth plus synergies from recent acquisitions plus new acquisitions. The are now repeating "10% top-line growth". Stats and guidance they presented in the last half year (hit $10m per month, new contracts worth up to $18m that will materialise over the next 18 months, revenues and synergies from acquisitions to be reflected in FY23) suggest they were well on track for 25% growth and $125m in revenue in FY23. If they are now flagging 10% growth and $110m for FY23 (nb, I'm not yet certain that IS what they are flagging) then a few things are not going as they had planned (perhaps acquisitions not playing out as intended, loss of some customers/contracts, unexpected internal inefficiencies). Perhaps related, they seem to have softened their stance on pursuing acquisitions in the short term, perhaps reflecting the constraints of debt and low share price.

All up, the FY22 results support my thesis and valuation. But if their outlook for growth has changed markedly, that would challenge my valuation.

I'll dig further into their reports over the next week or so and might fire some questions to Mike, their CEO.

Not much new from Stealth's ShareCafe webinar today. At the start the CEO Mike Arnold said all FY22 financials will be released next Tue 30 Aug. So today's webinar was mainly an introduction for newbies.

Mike reaffirmed what we already knew: FY22 $100m revenue, guidance of +8% EBITDA in 2025, ongoing 10% organic growth, and said Stealth is still actively looking for more acquisitions.

He did say he expects ongoing improvement in gross profit margin and cash flows.

He referenced the recent Corporate Connect valuation of Stealth at 33c per share. One tidbit of news (for me at least) was that he mentioned an ANZ valuation of Stealth at 28c - I wasn't aware of this valuation, anyone know more details of who made that valuation and when?

Overall he still sounded modestly upbeat (noting that Mike never gets massively upbeat), and didn't suggest any dark clouds on the horizon.

What wasn't said? Didn't mention FY22 profit margins. Also, apart from reaffirming the 10% organic growth and still seeking acquisitions, he didn't mention other growth expectations, whereas in other presentations over the last few months he has fairly consistently promoted 25% pa revenue growth out to 2025. Hard to know whether we should be trying to read between the lines here - maybe growth and margins aren't as looking as positive as previously communicated, or maybe he just saw no reason to mention them.

Either way, we'll have much better insight next Tue when full financials are released. Have to admit I was left not really sure of the purpose of today's presentation given he gave a very similar ShareCafe presentation back in May. Maybe they were hoping to have released the full FY22 financials by this time and he could have shared them with a wider audience (although they have always released their FY financials on the last day or two of Aug)? Or maybe it was just part of their contract with ShareCafe to do another webinar to promote the business? Perhaps it was intended to entice some people to look out for next week's full release?

Regardless, I'm excited to see full financials next week and hear the subsequent investor presentation. As I've said before, $2m NPAT (excl acquisition costs) will be positive and bullish, $0-2m ok, a loss will be disappointing and force me to review my thesis and valuation.

Stealth released a trading update today: https://stealthgi.com/wp-content/uploads/2022/07/2403091.pdf.

Boringly good. They are looking at $100m for FY22, which is what Mike has been providing as guidance for the last year.

Rev up 44% over FY21. Last quarter rev of $28m up 36% compared to pcp. Organic like-for-like growth (ie, excluding acquisitions and synergies from acquisitions) of 13% for the full year.

No information about margins. @Noddy74 has previously said the lack of margin results in their recent two trading updates is a concern for him. I'll go glass-half-full for now - they weren't doing trading updates until 2 months ago, so I'm happy (for now) getting more frequent sales updates. But we'll see if Noddy is reading the tea leaves correctly. They are aiming for release of full results late Aug. I'm hoping for $2m net income excl acquisition costs. 0-$2m would be OK. A loss would be disappointing.

Video update from CEO Mike Arnold on 12 May at Sharecafe: https://www.sharecafe.com.au/2022/05/12/stealth-global-strong-sales-growth-with-expectations-of-100m-revenue-p-a/. Nothing new for those following Stealth closely, but comforting to hear Mike again reinforce plans and targets that he has previously communicated. Over 8 minutes he discusses topics such as acquisitions, impact of inflation, revenue and margins.

Judges update: Points going to Andrew but no knockout yet and the fight isn't decided

I'll swap out my reporter's cap and put on my boxing judge's hat to give my view on the contest between Andrew and Claude regarding Stealth (see my other recent straw for my rundown on that multi-podcast battle; I'd suggest reading that straw first, and will make my boxing references here less bizarre!).

I'm giving early points to Andrew for what I think is a deeper and more nuanced view of Stealth, but Claude landed a few hits that investors in Stealth need to monitor. Disclosure, I hold Stealth, but hey show me a boxing judge who isn't biased. Here's my evaluation of the battle so far:

1. Growth: Claude was all flurry without landing any hits with his claim that all Stealth's growth has been from acquisitions. Stealth's most recent Q3 update indicated year-to-date sales growth that suggests around 15% organic growth in addition to recent acquisitions. And this aligns with CEO Mike Arnold's past guidance that over the next 3 years he expects about 10% like-for-like growth plus acquisition synergies, in addition to any acquisition revenue. I believe even Andrew painted a conservative view of Stealth's revenue and growth with his description of an "annual run rate of $100m". I'm confident they are on track for around $100m for FY22, which is what Andrew was referring to. But they are now around $10m/mth and still growing, so if we annualise that monthly revenue, and assume some further growth, Stealth is well on track to hit their stated goal of $125m in FY23.

2. Profit: I'm not sure why Claude thinks Stealth is loss-making from continuing operations given there was a small statutory profit in FY21 and the 1H22 update. Nevertheless, I agree that any profit (or even the size of loss that Claude suggested) is negligible - essentially the company is running around breakeven. Claude's call for demonstrated and meaningful profit is fair enough, and the lack of meaningful profit is no doubt holding some investors back. But I'm with Andrew and pretty confident we'll see around 2% net margin on $100m in sales giving $2m net income in FY22 (excluding one-off acquisition costs). If they can move from roughly breakeven to 2% net margin by end of FY22, I'll be confident they can continue the path towards 8% EBITDA in FY25 that Mike has suggested, and get to around 3% net margin in FY23. Based on current share price that puts Stealth on a forward PE of less than 3. 

3. Cash flow: One of Claude's point scoring hits comes from his concern that the coming inflationary environment may be a challenge for distributors and create a cash flow squeeze. He gave the hypothetical example of buying stock at $11, selling for $12, but having to restock at $12 or more. The error here, or at least the overstatement, is that this example assumes less than 10% gross margin. But Stealth has a gross margin of 30%, which they have successfully lifted from around 25% since IPO. So in Claude's example, they aren't restocking at $12, they are restocking at $9.10. So, yes, I agree with Claude that Stealth isn't tested in an inflationary environment, but that is a concern we can throw at most companies, and their cash flow challenge with a gross margin of 30% isn't as dire as Claude suggests.

4. Debt: A left hook from Claude on the topic of debt looked threatening. He's right that $15m debt and around $10m net debt is big for a company with market cap of $10m. But Andrew blocked Claude's swing by describing Stealth's debt as modest for a company on $100m of revenue and $2m net income. And Mike has said he is committed to capping net debt at 3x EBITDA. So, if they are profitable then debt is less of an issue. And if they can continue to grow profit, they can pay off existing debt or take on a modest amount of additional debt if sensible acquisitions arise. Still, Claude is right that Stealth is walking a fine line here, so Andrew and Stealth better keep looking out for that left hook. 

5. Dilution: An uppercut from Claude that landed is his concern about dilution. Claude sees dilution potentially driven by his predicted cash flow squeeze. And another threat for dilution is the drive to boost growth through acquisitions. With current debt levels, if an attractive acquisition arises, then capital raising may be the only funding option. But Andrew effectively counterpunched by pointing out that Mike has shown cautious capital management with all past acquisitions, and openly expressed his unwillingness to dilute shareholders (including himself as largest shareholder) with the current low share price. And there's a final point here aligning with Andrew's point that "things have to go really badly for Stealth not to be good value." Even if current shareholders were diluted a massive 50%, if that helped Stealth get a sound balance sheet and stabilise around $150m in revenue and 3% net margin (and I'm expecting a lot better than that), if the market granted a modest PE of 10, that would give a market cap of $45m and shareholders would still enjoy a 125% return on their current holding.

In summary, Claude has valid concerns about profit, cash flow, debt and dilution. A lot of potential investors giving a cursory glance at Stealth are probably being held back by similar concerns. I'm siding with Andrew on his favourable views regarding these issues, but Claude is right that Stealth will need to prove itself over the next 2 years. So here's a set of milestones that I'll be looking for Stealth to hit to justify my current valuation of 60c (compared to the current 10c share price):

1. FY22 revenue around $100m with 2% net margin (excluding one-off costs from acquisitions).

2. Ongoing trading updates showing they are tracking towards $125m and 3% net margin for FY23. 

3. Mike sticks to his promise to cap net debt at 3x EBITDA.

4. No capital raising below 20c per share (the original IPO price).

Rumble in the Stealth jungle

Your intrepid reporter recounts the highlights of the first two rounds (podcasts) in the brutal boxing contest between Andrew Page and Claude Walker as they battle over the future of Stealth Global. [Apologies to Andrew and Claude for my paraphrasing and any mis-quotes,.And I encourage everyone to seek out the original podcasts if you're interested in the original conversations.]

In the blue corner is @Strawman with a personal stake in Stealth. In the red corner we have Claude Walker and a gunslinging call-it-like-he-sees-it attitude. The bell rings for Round 1 on the Ausbiz/The Call podcast on Fri 13 May.

Claude comes bouncing out of his corner blazing away with a rapid right-left jab followed by a powerful uppercut. "I want to see more track record from Stealth. The Chairman said financials are strong but it's not profitable yet. Sales revenue improved mainly due to acquisitions, and there's $15m in total debt." And then he goes for the haymaker "And as Buffett has said, at times like this you want companies with pricing power that are not capital intensive. Distributors don't have pricing power and they're a cash sink hole."

The crowd is stunned, they're wondering if the battle is already over. There's a hushed silence as everyone stares at Andrew to see if he can recover. But to everyone's surprise, Andrew just shakes it off, beams his trademark winning smile to the crowd, and starts peppering his own jabs back. "Stealth is on an annual run rate of $100m and they have shown they are savvy acquirers at low multiples. As for profitability, they are looking at around 2% net income this year. Peers in the US are looking at 12-16% EBITDA, and Stealth is looking towards 8%. They serve a diverse set of customers and industries, and it's a fragmented market. Yes, you need to beware of roll-ups, but Stealth has set up well with a plug and play approach for acquisitions. It has aligned capable management, and the business is growing not just from acquisitions but also organically. And it's just such an asymmetric value proposition with a forward underlying PE around 5."

The bell rings to end Round 1. The crowd is enraptured, excited to see how this plays out.

Round 2 begins on Baby Giants podcast episode 28 on Thu 19 May. Despite the intense first round, our combatants are still looking fresh. This time it's Andrew who takes the initiative. 

"Stealth saw 40% growth last year. They're on a price-to-revenue ratio of 0.1. They have taken on a modest amount of debt for the right reasons. Their acquisitions have been sensible and not too risky. They have demonstrated strong integration of acquisitions, they're thinking long term, and been disciplined in killing off offshore and unprofitable parts of the business. Maybe they don't get near their target of $200m sales but even if they grow at only 10% and plateau at 3% net margin, the company is just dirt cheap. This a deep value play, things have to go really badly for this not to be good value."

The crowd turns their gaze to Claude and are initially a little surprised when he concedes some ground with his first few moves: "If they can build out and de-risk, the pool of investors will expand which can lead to PE multiple expansion. There is significant upside if things work out. I like the strategy of buying a business that is too small for most people and through hard work and bit of luck it gets bigger and suddenly has more buyers."

But then everyone sees Claude's cunning set up as he then starts to fire back: "But I'm worried about the journey from here. You say they're profitable but I'm not so sure of that. In their recent trading update, they promoted their sales, but there was no mention of margins. If they were profitable I would have expected them to say something. So it is reasonable for me to assume it is loss making. Add to that $9.6m of net debt. Debt is risk and sometimes you gamble and you lose. Debt plus loss making is a concern. Especially in an inflationary environment where there may be a cash squeeze with inventory turnover. If they buy a product for $11 and sell it for $12, they may have to pay $12 to restock. I see a good possibility of a cash flow problem and a substantial dilution of shares. I wouldn't be surprised if this a bigger company with a much bigger market cap in 5 years but do they need to dilute significantly to survive a tough period before they get there? I think their long term vision is something worth watching, it's just the next couple of years that I think is kind of dicey."

The pair exchange a few more jabs but the bell rings. Our fighters shake off some sweat and both share a nod of respect towards each other before they head back to their corners. Your humble reporter joins the crowd in immense admiration of our valiant challengers. We all now eagerly wait to see what Round 3 may bring . . . 

Stealth just released a brief quarterly trading update. Short, less than 1 page overview of group revenue. Main message: on track with previous guidance:

1. Group sales up 40% for the quarter to $26m.
2. Year to date sales up 49% to $70m
3. On track for annual revenue around $100m, which would be roughly 40% growth over FY21.
4. "Markets in which Stealth operates continue to perform strongly with positive momentum"
5. "Growth is expected across all businesses"

A very small acquisition for Stealth: https://stealthgi.com/wp-content/uploads/2022/04/2375361.pdf. It's a store in Albany. Won't move the dial much. Price looks reasonable. $0.46m for $0.3m in inventory, $1.4m annual revenue, $0.3m EBITDA, 30 year history of profitability. If subtracting inventory from purchase price, then paying approx 0.5 x EBITDA which looks attractive. Rationale is explained as twofold: to merge with existing store/operations in Albany (and hence I assume reduce competition), and as a pilot for similar mergers in other regions. Looks like a nice little win, but when compared to overall $100m of revenue across the group, not a game changer.

@Learner and @LifeCapital thanks for mentioning the Stealth article. One thing to note about ShareCafe is that their comms are largely paid-for promotions. I have strong conviction in Stealth, and everything in the article is accurate, but I believe the article probably came as part of a paid-for investor presentation that Mike did on ShareCafe a few weeks ago.

@Strawman and anyone who watched the Stealth pres today - Any thoughts, positives, red flags from chat with Mike Arnold today?

I'm fairly on top of Mike's previous presentations and their financials, as well as being in touch with Mike, so there wasn't a lot new for me. But I thought he came across as fairly transparent and I continue to be comforted by his knowledge of the industry and business, and having a clear vision for what he wants to achieve. The consistency of his message and answers across recent presentations is also a plus.

He reiterated his confidence about growth. He showed high conviction that we'll see 25% growth over the next year, which will take them to $125m by end of FY23. So that's a metric to assess against.

I like that, for the second time now, he has flagged a hostile takeover as a risk, reaffirming his belief that the company is substantially undervalued at present.

It's the first time Mike has stated what he believes he can achieve with NPAT . . . 5%+ NPAT when EBITDA hits 8%+ in 2025. Have to say that sounds like a challenge given tax alone will drop an 8% EBITDA down below 6%, and there will be interest and depreciation expenses. The valuation I've posted for Stealth assumes 3.5% NPAT in FY2026, so that's conservative compared to what Mike stated. But my overall impression of Mike has been that he is relatively conservative, and IF he's accurate with growth and NPAT, Stealth will be doing $200m in rev, and $10m+ in NPAT, in 3 years . . . for a company currently with a market cap of $12m at time of writing.

My valuation of 60c for SGI is more conservative than Mike's vision, although still bullish, with them hitting around $200m in 2026, a year later than Mike suggests, and only delivering 3.5% NPAT at that time.

The test is whether, over the next few halves, we see revenue, EBITDA and NPAT track towards these targets..

On Mon 21 March, CEO Mike presented as part of a Share Café investor webinar. He had Covid at the time, although it looked like it wasn't hitting him too hard, mainly evident through a croaky voice. Much of the presentation covered information previously presented or available, but there were a few new insights.

The video recording is available here: SGI Hidden Gems Webinar 25.03.22

The presentations slides are available here: https://stealthgi.com/wp-content/uploads/2022/03/2360211.pdf

It was the first time I've seen a detailed breakdown of the industries they serve:

And first time I've seen a breakdown of products, with Mike saying "We are the only company that provides a single source for this range of products":

Finally, Mike said they were on track to deliver a record sales month in March of around $10m. Even without assuming any further growth, that's $120m annualised going into FY23, which would be 20% growth on the $100m+ guide Mike has previously given for FY22. Given that Mike has recently announced $18m/yr new contracts (on top of existing revenue) that will build over the next 18 months, there's good support for Mike's guidance of 25% pa growth at least for FY23.

I'm still feeling comfortable with my valuation of 60c compared to the existing price of 12c. As previously disclosed, held IRL.

@wtsimis Yeah, I've seen the same, with a 1m+ parcel of shares briefly sitting at 12c. In the past with my own buying I've noticed there has been a bot auto accepting offers - not sitting on market depth views, but immediately accepting buy offers. Last year I noticed this at 15c, more recently same thing happening at 12c.

Last year Perennial Value Management drew down a substantial holding of almost 10% and are now no longer a substantial holder. Not sure what level they hold now (they show on Simply Wall St as 4.75% but I think that's just the last notice they submitted when they ceased being a substantial holder), they may have continued to draw down, although Mike says they are still a shareholder.

Hard to know who might be selling a parcel of 1m+ shares. Unlikely a short term trader. If it's a substantial holder, we'll learn in time. Maybe an IPO investor who came in at 20c and has lost patience? Maybe someone distress selling? Maybe someone who came in when shares were 7 or 8c and taking profit. Ultimately, their loss I think.

But it does suggest the share price may sit around 12c until that parcel is offloaded. Anyone with a cool $100k want to chip in to help?

At recent Share Cafe presentation, CEO Mike Arnold mentioned a new brand "Trade Counter Direct". I followed up with Mike, and he said it will launch before mid year and will be a pure online, click and collect, sales channel. Feasible at this point in Stealth's growth because of their recent investment in building an online marketplace for all its existing brands, and the much wider distribution network across Australia arising from recent acquisitions. I'm not sure why a new brand was needed or why the focus on click and collect rather than delivery, maybe something to follow up at Mike's presentation on Strawman next Wed (6 Apr, 12pm AEST).

@Strawman Andrew, I see you’ve dipped your toe into Stealth/SGI with a small position. It’s not your typical tech stock in which you usually play. If you have time I’d value hearing your views of the business, valuation, risks, etc.

All good news from CEO Mike Arnold when he gave an investor presentation yesterday (Fri 11 Mar) reporting 1H22 results and updating outlook. Yet the share price has dropped along with the broader move against small stocks. Still, the stats and message was that SGI is delivering to plan, and in some stats exceeding previous forecasts.

I've very slightly increased my valuation to $0.60 (=$60m market cap), and this is based on more conservative estimates than the CEO has forecast. I'll shortly post my calculations in an updated valuation for SGI. At time of writing I think shares are a strong buy at $0.12 ($12m market cap seems ludicrous for a company that has grown from $22m to $100m revenue in 3.5 years and started to deliver profitability).

What I continue to like about SGI is that, in Andrew's terms, the risk is asymmetrical. This isn't a company with a radical new idea/product hoping to become profitable in some distant future. It is a tried and true business model that is profitable now and is on track to keep growing at well above GDP. At current share price, there would have to be some pretty massive skeletons in the closet emerge to lose value over the long term. My very pessimistic bear case is for shares to be worth $0.18 (market cap $18m) by end of FY26, which would still be a return of 10% pa. On the other hand, my best guess is shares will be worth $0.90 (market cap $90m) by end of FY26, a 60% pa return. And it doesn't require massive optimism for SGI to be a 10 bagger within 5 years. Worst case, if the share price doesn't budge, we could easily be looking at a fully franked dividend yield of 20% in a few years - and that only assumes a payout ratio of 50% of NPAT. I'm all ears for any reasons why I might be wrong, so please shout out, because I've taken a heavy position in SGI in Strawman and in real life.

@wtsimis gave an update of some key numbers in a post about 2 weeks ago. I won't duplicate those, but here's additional info and insights from Mike's presentation yesterday:

1. Mike confirmed recent acquisition of United Tools will proceed (it was subject to United Tools member approval)..
2. Confirmed on track for $100m revenue this FY.
3. Boldly (although Mike has been pretty balanced and accurate in the past) forecast 25% pa growth for next 3 years achieved through organic growth, acquisitions and synergies/cross-selling from the acquisitions, which would get SGI to $195m revenue by end of FY25.
4. Said EBITDA will remain around current 4% in the "short term" (1 year?) as recent acquisitions are consolidated, but reconfirmed 8%+ EBITDA for FY25; on $195m revenue = $16m in FY25.
5. Mike has shown continued willingness to drop low margin customers and rationalise operations. A couple of years ago they dropped their Africa business worth about $20m in revenue because it was unprofitable. In their recent Skipper Transport acquisition they let go 12% of Skipper Transport revenue from unprofitable customers. Most recently, they sold a small joint venture in the UK for about $1.6m that was doing around $2m revenue but unprofitable. Operations are now almost entirely Australian based.
6. As wtsimis noted, if there is any emerging concern to watch it is the growing debt. Net debt grew by $5.5m over last 6 months to $9.7m, mainly due to final payments associated with 2 recent acquisitions. Total borrowings are now around $15m. So there is some sensitivity to interest rate increases (1% increase = $0.15m increase in costs). Mike acknowledged shareholders' possible concern about debt but expressed confidence that it is comfortably covered by EBITDA. He indicated his aim to keep net debt/EBITDA to a maximum of 3x.
7. There were a few questions at the end of the presentation:
8. Q: Are their plans to consolidate the 5 sub-brands into a single corporate brand?
9. A: Not in the short-to-medium term, because the brands have a long history and value through customer loyalty. Perhaps in the longer term consolidation could be considered when brands are essentially acting as one, and the Stealth brand is better recognised.
10. Q: Is SGI experiencing any impact of inflation?
11. A: Yes, mainly through freight costs and some supply constraints, but Mike expects much of this to be short-lived. Some of this will may need to be passed on to customers. But some can be absorbed through increased scale and buying power.
12. Q: Are more acquisitions on the cards? If so, what size?
13. A: Yes, but biggest short term priority is to consolidate the 3 acquisitions that occurred within the last year. Ongoing growth will be a combination of organic like-for-like growth of around 10%, acquisitions, and synergies/cross-selling from acquisitions. Ideal size for acquisitions is around $15-20m - these can be relatively easily integrated. A larger acquisition is always possible if the right opportunity arose, but unlikely at this stage as it would require capital raising which Mike sees as unattractive at current share price of $0.12.
14. Q: Could SGI be acquired?
15. A: Mike hopes that current structure and incomplete integration of brands would discourage an acquisition (curiously Mike answered this question as if it referred to a hostile takeover given the low share price, rather than seeing an acquisition as a desirable outcome; I interpret Mike's reponse as a positive sign that he believes the company is substantially undervalued, and also that he is not on the lookout to sell the company in the foreseeable future).
16. Overall, Mike was sounding more open, less guarded with shareholders in this presentation. He's still not the most charismatic CEO, and maybe that's not possible or desirable for an industrial parts distribution business. But nevertheless, he seems to be warming up and feeling a little more comfortable and inviting with investor relations.

All up, as I said above, I still see the share price as massively undervalued. Market cap of $12m for a company that is currently doing $100m revenue and 4% EBITDA, with a conservative CEO forecasting 25% growth?? Still, if you invest in SGI you need patience because of the very small market cap, low liquidity, and nascent profitability. Because of its current market cap SGI hasn't caught the attention of many analysts or investors. But fledgling profitability that is highly like to grow in the next couple of years will inevitably demand attention.

Along with yesterday's announcement of acquisition of United Tools Limited, Stealth also released preliminary 1H22 results, reporting over $46m first half revenue putting them well on track to hit or exceed previous guidance of $95-102m yearly revenue despite Covid complications and lockdowns (1H results don't fully reflect ongoing revenue because of an earlier acquisition completed mid Aug). CEO reiterated goal of 6% EBITDA margin for FY22 and tracking for >8% in FY25.

All continues to support my valuation of SGI at $0.56 compared to this morning's price of $0.15. If anything, I'm tempted to revalue upwards, but will save that for a later date when I have time to explore the acquisition and official 1H results in detail. For those new to SGI see the video of my Strawman stockpitch last Oct at https://strawman.com/meetings or the pdf of my pres (with valuations on last slide) at https://strawman.com/member/uploads/objects/44/43d609bec741e1f1c89d2ec778c7521a32a477.pdf.

As @Noddy74 and @wtsimis have already flagged, Stealth (SGI) have announced another takeover, of United Tools Limited. Share price jumped yesterday although has given up some of the gains this morning. ASX announcement is here: https://stealthgi.com/investors/asx-announcements/.

I haven't had time to explore in detail, but on quick inspection acquisition looks very attractive. Looks like UTL is a distribution cooperative that Stealth will be privatising. Annual revenue around $8m, only marginally profitable (as expected from a cooperative). As Noddy74 noted, on the surface looks like they are purchasing for the value of the cash in the business. The UTL shareholders/members are yet to approve, but the announcement sounds confident of approval. The benefit to the members is that the existing operating cash of $1.25m sitting in UTL will be returned to members. Assuming no skeletons in the closet, the benefit from Stealth is twofold: First, scale, which is the CEO's major strategic objective to establish as clear market leader in highly fragmented market, Stealth is aiming to bring substantial efficiencies and cost savings to UTL.And second benefit is an important balancing of distribution network which previously was weighed towards WA but this acquisition will give roughly even distribution across WA, Qld, NSW, and Vic, as well as a smaller presence in SA and NT.

Below is a trading update on SGI from AGM last Mon 29 Nov. One line summary: tracking ahead of my base case valuation (see posted valuation on Strawman, or video of my pres at Strawman's stock pitch meeting on Oct 22). Reaffirms my estimate of share price of $0.81 by end of FY26, in fact the trading update released at the AGM is an early indicator of an even rosier picture. Current price is $0.155 suggesting huge potential, with what I believe is minimal downside. I've been following this stock closely since mid 2020, have been steadily purchasing Sep 2020 when share price was $0.079. I have an outsized position with this company with over 40% gain so far, but I'm nowhere near tempted to sell.

Trading update from AGM:

1. CEO Mike Arnold describe FY year-to-date performance as a "strong start"
2. Recent internal focus has been on: 1) consolidation of 2 recent acquisitions of C&L Tools and Skipper Transport, 2) building and integrating online shopfronts across its brands, 3) integrating ERP across brands, 4) modernising physical shopfronts, 5) modernising online and physical catalogues.
3. Oct saw record monthly revenue of $8.5m. Avg revenue of $8m from Sep to Nov (and Nov was not complete at time of AGM). The starting point of Sep for this average may seem odd, but it's because the acquisition of Skipper Transport was completed 15 Aug.
4. Mike emphasised the growing benefits of scale, with gross margin steadily increasing from 24%, to 26%, to 29% over the last 3 years.
5. Forecasting $45m (+-5%) for 1H22 (which only includes 4.5 months of recent acquisition of Skipper).
6. Several new contracts recently awarded valued at $18-27m annual revenue, commencing over next 4 months, hitting full value in 12-18 months.
7. Described expected synergies of recent acquisitions at $20-25m, above previous estimates of $10m.
8. Estimated addressable market of $40b, currently highly fragmented.
9. Believes 8%+ EBITDA achievable in 2025. The "+" is the new addition here. Mike added the explanation that comparable companies are achieving 12-14% EBITDA and Stealth can steadily move towards those figures with increasing scale.
10. As a forecast for FY22 revenue, Mike re-stated previous guidance of $95-102m, but (like with EBITDA above) added a "+" and said this guidance does not factor in the new contracts worth $18-27m in annual revenue that will commence in 2H22.

All up, $100m+ revenue for FY22 seems likely, with strong chance of 15%+ growth in FY23 given recent new contracts. Even without a further acquisition my base case forecast of $150m revenue in FY26 seems very achievable, even conservative. Even if only half of the 8%+ EBITDA flows through to NPAT, that's $6m . . . for a company with current market value of $15.5m! I still see this as a screaming buy. And I would buy more if I hadn't already taken a highly aggressive portfolio position in Stealth IRL.

As guessed in my previous straw, Perennial Value Management just submitted a Change in Substantial Holding for SGI showing they have dropped their position from around 6% to just over 5%, consistently selling around $0.15. Don't know where their endgame sits, but for a while at least you might get easy buys at $0.15 until they finish their drawdown.

Looks like someone has a bot auto-accepting offers of $0.15 or greater for SGI. Their position isn't shown in market depth views, so their sell order isn't sitting on the ASX, but I just submitted an order to buy at $0.15 and it filled instantly - a human didn't accept my offer, it was automated.

A guess (but it's just a guess, no insider insight) could be Perennial Value Management who have been slowly reducing their substantial shareholding over the last few months from over 9% of SGI to most recently sitting around 6%. They were around when I started investing in SGI in Sep 2020, not sure when they took their position but possibly from IPO in 2018 given low trading volumes since then.

IF it's them, and IF they are looking to completely move out of their position, then the share price could sit at $0.15 for a while (but there are a lot of ifs in this guess). If I buy any more (I'm already heavily positioned in SGI so further buying from me will be limited) I'll definitely be setting limit order at $0.15 (unless I start to start to see unfilled buy orders sitting at $0.15 in market depth views).

Share price for SGI bouncing around today. Maybe some Strawman members starting to buy. Looks like there might be one or more sellers still out there at $0.15 so if you're looking to buy you could consider setting limit order around this level if you're concerned about short-term cost minimisation. But in the medium-to-long term it won't matter much if I'm anywhere near right with valuation. The price will be volatile in the short term because of low price and volume.

@Solvetheriddle, thanks for insights into distribution companies. REH and BAP are great comparisons to keep an eye on and learn from, albeit much larger in size. I noted some high level financial stats from those companies that provide a guide for SGI: eg, market caps for both are around 1.5x revenue, EBITDA around 10-15% of rev, NPAT about half of EBITDA. As you say, these are strong companies, SGI has some way to grow before earning that credibility, so need more conservative expectations in the short term at least for SGI.

Love your points about scale, exclusive distribution rights and customer service. Scale, they are aware of, and are aiming for ongoing acquisitions. I haven't heard them talk about exclusivities, so will ask them about possibilities. And I flagged in my presentation they can do better at capturing and reporting customer value/retention/satisfaction measures - I think they must be doing at least an OK job here or their revenue would be tanking, but it can be a stronger focus for them.

I find comfort in the comparisons with REH and BAP. My base case valuation for SGI still only assumes market cap of 0.6x rev (compared to 1.5x for REH and BAP) and EBITDA of 8% of rev (compared to 10-15% for REH and BAP).

Here are the slides from my stock pitch this evening

Stock Pitch SGI v01.pdf