Taking stock of the release of Stealth Group results over the past 72hrs I sat back and listed why I bought a slice of this company.

This was over two years and the underlying basis / reason was VALUE.

Stealth was trading cheap across all metrics including share price. I found the Free cash Flow yield (FCF) over the past 2years as the most interesting. At 28mill market capitalisation and with FCF 4.7m yield is 16.7%. This presents itself at 3-5x higher than other retailers.

Stealth Group wasn't performing or delivering results with ROE of 20% + two years ago. The results were more like mid single digits ROE but on the pathway to be profitable and grow its margins and customer base.

Without needing to do much right, consensus (which is always scary) saw more upside than downside. A value play indeed. These factors still present themself in 2024 even though we have good appreciation in market capitalisation and share price.

Stealth Group continues to craft its niche to be an alternative to the majors and in doing so there will be questionable acquisitions and moments in its trading results to but what was attractive over 2 years continues to hold true in 2024 in terms of of a value play.

WHY?

Time enables us to watch and assess the credibility and quality of the CEO and management group and although we have seen slips in the revenue forecasts what i ascertain is that this has been done with the profitability lens (see below in the Individual Business Highlights). This has and is more critical for stealth being in a low margin highly competitive market.

Comparing with other retailers for FY24 we have seen revenue fall for HVN (8.9%), ADH (4.3%) but NPAT fall significantly higher HVN (34.7%) ADH (17.8%). This has not been the case for Stealth infact we have seen rise in revnue but significantly higher rise in profitability and EPS.

Its fair to say that the environment is tough in retail.This is not only reflected in Stealth commentary but was also a feature in Wesfarmers results re Bunnings and Blackwoods last week . CEO Rob Scott and divisional lead for Bunnings were put under much pressure on the conference call last Thursday re Bunnings flat growth and outlook.

I find Mike's approach refreshing especially in delivering shareholder value (self interest plays a major role)

There were question marks over two years ago and there are question marks today which i look forward to the upcoming conference call on Thursday 5th September to have them answered.

What must be recognised is the improved business results over the past 2 years . This in turn has seen share price appreciation well over any index and most small cap stocks.

This does not gaurantee success going forward but as we all recognise past behaviour is a good predictor for the future.

Taking a detail look into Stealth Results i would rate 7/10.

The areas of watch :

• Force acquisition and outlook in terms of revenue and profitability
• Revenue growth especially organic 2025 - 2028
• 60mil plus in revenue flagged in new organic at AGM in 2023

Metric focused organisation - Highlight and strength and hard to fault . Keen to see the next two years in terms of these trends evolving especially in light of the Target 300m in revenue and 8% EBITDA margin call out by 2028.

Impressive is the 28.1 % growth in EBITDA in light of 19.4% revenue growth. Highlights focus on profitable customers.

Also important to call out the improvement made in inventory as a % of sales which has fallen from 16.1% to 13% or 19.25%.

Mike and the team clearly understand the importance adjusting as conditions change and improved inventory management.

Ability to pivot - In H2 when revenue fell away its clear Mike and team pulled back accordingly on costs reflected in personnel costs as a % of revenue falling from 18.2% in H1 to 17.4% in H2. This resulted in total expenses as a % of revenue falling from 24.5% in H1 to 24.1% in H2.

As sales with Force acquisition kick in this will be a key watch in terms of maintaining this downward trend for costs.

Clear in guidance - Mike and the leadership team haven't hesitated to put on the table the aspirations in seeking to gain share of the fragmented industry of industrial maintenance, repairs and operations and now with Force consumer technologies products and services. Albeit having to adjust as conditions alter Stealth North Star of 300million and 8% EBITDA by 2028 is set and clear.

Taking the outlook and guidance numbers provided above the range of the results may evolve to be

Rev - $159m

GP - $46m-55.65m

NPAT - $2.38m - 5.565m

EPS 2c- 4.78c

Div - 1.2c - 2.86c (60% payout ratio assumed).

Held

Ahead of the release of Stealth Group FY24 Results WES Blackwood division results are always interesting to monitor and use as a comparative.

Revenue up 1.5% to over 2billion for the FY and conditions remain tough heading into 2025.

New Zealand were down but Australia was up.

Earnings Before Tax rose by 9% to 109m.

Workwear sales flat on last year highlighting competition and conditions.

Taking the guidance provided by Mike Arnold in June 2024 will be looking for Stealth Results to reflect following range

From a valuation standpoint WES trading at 34 x 2024 earnings with 1.5% growth in Revenue and 3.6% growth in Earnings.

Without doubt a mature safe and consistent investment but current valuation doesn't offer appeal.

SGI will be trading at 15-20 earnings with significantly higher revenue growth in 2025 (approx 30%) due to Force Acquisition and organic growth and EPS growth into 10 -20% for FY 2025.

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.

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..

Just looking at what the announcement says about the likely FY24 PE outcomes on both a pre acquisition and post acquisition proforma basis at the current 25c share price.

Note “transaction costs” are excluded – so this is based on the dreaded NORMALISED results

Vanila SGI (Pre-acquisition)

Sales of $159m less $44m expected for Force gives $115m (I was expecting $122m so a little off)

EBITDA of $8.5m less $2.64 (6% EBITDA) for Force gives $5.86m (I expected $5.94 so close)

Less Depreciation $3.2m and Tax $0.75m (my estimates)

NPAT = $1.91m (I had estimated $1.98m so confirmation bias is locked in Eddy)

PE = 12.5 (before dilution), 14.6 (post dilution)

Full Year Proforma (fully of both)

Assuming the same NPAT to EBITDA ratio as SGI has above: NPAT is 1/3 of EBITDA

Full year proforma EBITDA = $8.5m

NPAT = $2.83m (proforma full year estimate)

PE = 10.2 (post dilution)

The acquisition was a surprise at first – mobile accessories was the last thing on the mind, BUT – Stealth is a wholesale and logistics business for retail… so could make sense – will wait for tomorrows presentation to come to any real conclusions beyond the numbers look good and value is added on a proforma accounting basis.

Disc: I own RL+SM (largest positions for both…)

Mike and the team have a good track record of acquisitions, but I was a bit surprised to see them move into the mobile and tablet accessories market. Seems like a bit of a departure from the current product set (although, that's quite diverse in itself)

Full details here, but some early thoughts from me are:

• 4x EBITDA multiple seems reasonable
• New shares represent ~14.5% of current shares on issue.
• Pro-rata H1 EBITDA for stealth (pre-acquisition) gives $5.6m in FY24 EBITDA. Force should add ~$2.6m (pre-synergy), which is a 47% lift (ie. it is certainly accretive, and tracks what Stealth says about the deal being 43% EPS accretive before synergies)
• The vendors will have a 12.5% ownership stake in Stealth post acquisition. Combined with the earn out bonus there should be some good alignment. ie. the vendors will have some incentive to stay engaged and ensure a successful integration.
• Not sure how high the hurdle is for the earn out payment -- Force is already exceed the threshold in the current year.
• Synergies are always talked up with acquisitions, but it does seem reasonable to assume there will be some degree of opportunity here given SGI's investment into logistics and warehousing.
• Debt wont be too onerous after the deal -- they'll have $11.2m in debt, and Stealth said they will use cash flows to help deleverage things in the coming years.

I'll try and tune into the investor call tomorrow. But overall this looks like a positive.

Big seller on the market the last few days. I took a nibble. Does anyone have an idea who it is?

Stealth copped a "please explain" from the ASX today, following the spike in share price after the presentation they gave for ShareCafe.

You can read their response here, but honestly this was an obvious and easily avoided mistake.

An investor presentation the day before results were out, in which unaudited numbers were disclosed is, frankly, bizarre.

They reckon this information was already out there, referencing guidance and progress made in November, but some guidance in November is hardly the same as pre-audit numbers after the period end.

It doesn't really change the thesis for me, but it's a mark against them.

I hope they learn from this and take better care in the future.

AFR is reporting

“Richard Murray helped grow a tiny JB Hi-Fi into a flagship Australian retailer. His new employer Metcash hopes he can do the same in tools.”

SGI might be looking at more competition?

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.

17% pullback on nano/micro and small caps is not unusual - so definitely take the gift today to add to my personal holding.

This may be something to keep an eye on when Stealth report next and could be a concern. There was a major change in their trade and other receivable's vs trade and other payable on their balance sheet in FY23 vs FY 22.

In FY 22 accounts receivables were $18m vs accounts payables of 18.6m, a $600k difference

In FY23 accounts receivables were $17m vs accounts payables of $21m, a $4m difference.

So they owed $4m more than what they were due to receive at financial year end. This would have skewed the cashflow to the positive when taking into account the money owed versus what is due.

Just something I am watching.

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.

3rd quarter sales hit $29.2m, up 12.6%. For the first 9 months of the year, sales are up 17.4%. Both are records for the company.

If they achieve the same result next quarter, or we just pro-rata the first 9 months, it puts Stealth at around $110m in FY23 sales for continuing operations.

36% of revenue comes from mining, resources and infrastructure, which the company is seeing "ongoing high demand".

Inflation still a challenge, but price increases is expected to contribute to an increase in profit.

The Skipper and United Tools acquisitions are still yet to realise "significant" cost synergies.

The company has previously said it expects margins to improve -- and this is a big part of the investment thesis -- but if you assume a net margin of just 1% in FY23, the forward PE is around 10. Not bad for a company enjoying double digit revenue growth.

See full ASX announcement here.

Disc. Held.

Here's a recording of the recent results meeting: https://vimeo.com/805827197

Key points:

• It's a very resilient market. Most of what they sell (95%) they class as non-discretionary.
• The addressable market estimate is now over $50b -- and very fragmented. I read that as a lot of acquisition opportunity, and an opportunity to build a scale advantage over other players.
• Strategy is clear and consistent, with a focus on ROI and capital management. There's a long way to go before the vision is fully realised, but I think you can say objectively that the company's growth and execution has been pretty decent to date.
• Higher fuel costs and other cost issues a factor, but have the ability to pass on higher costs. Price rises will help improve margins in the coming quarters. Gross margins were mostly maintained in the reported period
• Getting more invitation to tenders. Not just about cost competitiveness, but range and reach.
• $260m worth of spend across the group -- have set up a procurement division to better leverage this to negotiate for better terms.
• Closed unprofitable sites accounting for $2.4m in annual sales. Only interested in sites that make financial sense, and will be focused on further rationalisation if needed. This should improve margins across the group, even though it will have a revenue impact. It's the right thing to do.
• Brands will likely be consolidated under one banner.
• Proprietary products expected to grow to 15% of total (also leads to better margins)
• Technology expected to help improve efficiency -- overall, very focused on costs and margins.
• Inaugural dividend proposed for FY24 (maybe 30% of FCF).
• Acquisitions remain a core part of the growth strategy, but next 6 months will remain focused on bedding down recent purchases. Have walked away from lots of opportunities. Must make financial sense.

Thesis remains on track.

Held.

Thanks @DrPete for your detailed straws. I have been following with great interest. I previously owned SGI IRL and no longer hold. However if margins improved as suggested by Mike Arnold I would certainly be back in.

Since listing SGI’s track record for net margins have been thin and erratic, 2019 (1.2%), 2020 (0.3%), 2021 (2.8%), 2022 (1%) and forecast FY23 (1.5%). So the best net margin since listing has been 2.8%. Even if net margins could be lifted to a consistent 3% this would dramatically change the valuation of the business.

The resulting return on equity has also been mostly single digit and erratic, 2019 (5%), 2020 (3.1%), 2021 (10%), 2022 (5%) and forecast FY23 (10%). If the margins lifted to 3% this would double ROE from 10% to 20%.

If I use McNiven’s StockVal Formula assuming ROE of 20%, book value of 15 cps, a payout ratio of 20% (fully franked), you could expect a 17% annual return on a current share price of 21 cps.

On the other hand if net margins remain at 1.5% (FY23 forecast) giving you a ROE of 10%, and assuming a payout ratio of 20% (fully franked), you could expect an 12% annual return on a share price of 12 cps (today’s share price)

So clearly the value case for SGI lies in fatter net margins. I think the market is thinking that a 1.5% net margin is as good as it gets.

Disc: not held

Dr Pete thanks once again. Brialliant insight depth of analysis.

Hope i am reading the release correctly but H1 2023 had 3 less working days compared with 2022 (123v 126days) .

In terms of revenue this would see an additional $426k per day totalling $1.278million for the half. If these days are picked up in the second half at a 20.5% uplift as stated by Mike in Jan and Feb revenue update we may see an an additional $513.3k added per day or $1.54million additional for the second half.

Disclosure its my 3rd largest position in my Australian portfolio and topped up at 0.12c today which i am surprised we are still seeing.

Is what we are seeing in terms of stagnant share price movement to the upside reflective of the size of Stealth in terms of market capitalisation and razor thin margins at play?

What strikes me about Stealth which isn't being recognised is the strength in execution by Mike and the team. This is a playbook which has been replicated over the coarse of time and if executed well rewarded shareholders well.

No better seen as the information below

Stealth released results and much to like as DrPete123 shared and credit to Mike and the team a they continue on the path of growing the business but doing so with higher margins to ensure shareholders can yield the benefits of their investment

No better illustrated in the information below with revenue rising by 18% but underlying EBITDA rising by 41% or 2x the rate.

This saw EBITDA margins rising to 4.6% and well on the path to the 8% target by 2025.

Debt and balance sheet continues to be the call out risk but it seems to be well in check with plans to continue to drive down the 10mill owing each quarter thus reducing the gearing ratio. In H1 2021 this gearing ratio was 41.6% and have now been reduced to 39.5%.

Looking forward Stealth remain committed to revenue of 200m plus by 2025 and EBITDA margins of 8% plus.

Jan and Feb 2023 have started well with revenues up 20% plus and as previously commented over 95% of what SGI sells should be viewed as non discretionary especially in the mining, resources and infrastructure markets where 36% of SGI revenue is derived

One interesting is the desire to pay an inaugural dividend in 2024 which will be 30-40% of FCF.

Conference call tomorrow 1st March 1230pm AEST. see link below

Stealth 1H Result Webinar Link:

https://attendee.gotowebinar.com/register/1896754744304124250

Disc Held SM and RL . Top 5 position in portfolio

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.

Sitting back and dissecting Stealth Group recent announcements relating to the first four months a key feature coming through is the consistency of the message by management and favourable risk reward scenario.

The AGM saw Mike Arnold provide some clear bullish signals for the business in which how they are wining and will be able to continue to win.

I would summarise these as follows

Objective over the next 12-18months will be to simplify the business after three acquisitions in FY 22 to be more efficient via reducing costs , duplication, optimising supply chain. This will see 2.2mill added in NPAT for FY23.

Optimise store footprints to drive sales and improved margins

From a supplier front moving into volume based pricing and rebates with major suppliers (can only happen at scale)

Continue to win organically via tenders

Cross selling across divisions

The B2B nature of the revenue (83.8%)is also a benefit as business will continue to spend especially int he tight labour market we have. Revenue is also broad from a sector perspective across resource , construction, trade and transport .

What felt as the kicker is the inflationary "tailwind" at play which Mike referred to in which yields and margins will be able to expand.

A 100 basis points expansion from 4.9% to 5.9% equates to EBITDA increase to 7.1mil in FY 23 from 4.9mil in FY22 or 45%

If this were to be 200 basis points to 6.9% EBITDA would expand to 8.3mil

Disc held on SM and Real Life = Top 10 holding in portfolio

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.

Stealth released results following the close of trading today and were very solid with a couple of areas to watch .

Rev up 101.8m or 46.1% for the year

Online sales continued to expand to 2.4m or approx 9% in FY21

B2B sales = 83.8% of sales with a focus on the industrial sector as the driver of most sales.

Second half revenue was 55m v 47m in first half.

Comments about the future by Mike Arnold were " full benefits of the acquisitions, synergies and large contract wins to be materialised in the next 24months"

Excluding Acquisitions organic revenue up 21%

Gross profit margins expanded to 30.2% . This expansion has continued over each year from 18.5% in 2018

Underlying EBITDA 6.7m up 131% on FY 21 of 2.9m. Currently trading at 2.1x EBITDA

NPAT 2.4m v 400k in FY21

This result includes a 1.4mill investment in store refurbishment in Kalgoolie .

Cashflow was 2.2m .

Two areas to watch

Balance sheet . Debt is 10.2m and cash available is 7.5m. Not a huge concern as this was mentioned repeatedly through the report as an area of focus and history says this have been well managed

Inventories rose to 14.1m from 9.2 or over 50% . Comments on this reason were due to the acquisition of Skipper Transport Parts. Existing inventories rose 1m . Will watch this over the coming year.

Remain bullish and happy to keep adding if SP holds or falls from 13.5c.

SGI valuation = 5x EBITDA = 33.5m 0r 32c

Coming from a held position todays' announcement feels bullish in terms of what the Fy22 results will yeild .

I will be expecting NPAT to continue the 2% margin of the first half and optimistically see this expand providing a NPAT figure of 2 - 2.5mill for the full year.

Mike Arnold disciplined approached to capital management is where i gain the confidence and will go a long way to getting the stock rerated.

With the share price at 10c and MC at 10mill Stealth is trading on a NPAT multiple of approx 5x .

More broadly it's nice to be able to comment positively about the prospects of a company on its performance .

Feels like a long time when we were last doing this .......

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.

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 . . . 

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.

@DrPete123

Yeah I found Mike to be very straightforward, and with a clear vision for the business.

On top of what you have mentioned, I liked:

• How they have walked away from several acquisitions. For a company with a clear focus on consolidation, that takes a hell of a lot of discipline.
• How they are prudent in terms of their use of capital. Choosing debt over equity is smart, in my opinion, given the current market price. He was extremely aware of the risk of dilution. Also, given the multiples paid, the payback period on some of these acquisitions will be very short.
• Mike seemed to have a clear focus on employees, recognising their value and investing time and effort into incorporating acquired staff into the culture.
• Buying growth is one thing, delivering organic growth post acquisition is another. They seem to be doing really well on this front.
• The 'plug-and-play' nature of ERP systems and logistics assets should allow them to bed down acquisitions relatively quickly, and unlock a good deal of synergies.

I'd also reiterate that this seems very asymmetric in terms of possible outcomes. On a 2% underlying net margin, Stealth is on a PE of something like 6 (give or take). This is a business on a $100m revenue run rate trading at $12m...For a business that's looking to grow at 25%, is profitable and delivering positive operating cash flows, that just seems extremely undemanding.

Ok, maybe their growth doesn't turn out what they expect it to be. Maybe margins don't grow as hoped. Maybe the market will never ascribe a high multiple -- but the margin of safety is huge.

On the negative side of things, I wish companies would forget about trying to engage IR people (no offense to those in this space). I understand how it's frustrating when the market doesn't see the value, and i can appreciate wanting to spread the story far and wide, but i just wish they'd let the fundamentals tell the story. SenSen and others have also mentioned their efforts on this front. To his credit, Mike did say his focus was on just getting on with executing the strategy. Anyway, it's not a big deal, just a small gripe of mine.

I added more to my Strawman portfolio today, and would like to add more in real life when i get some spare cash.