The AGM recording is available: Stealth Group Holdings AGM 2024 - Webcast Recording on Vimeo

After market there are 35 buyers seeking 1.2m shares from 1 seller of 50k shares… gives you a feel for investor opinion on the results and AGM.

Mike focused on the FY25 to FY28 outlook and plan in his presentation, have a look. 

My takeaway is the focus on efficiency and growth that improves margins and profitability is the story, the same one as when I initially invested 3 years ago. The $60m sell through is still in the plan, starting in next 90 days under a new business “United Supply Company”.

Disc: I own RL+SM

Mike Arnold sold 500k shares of his 10 mil (5%ish) for 200k ‘for tax purposes’

Unconcerned. Small amount of shares and Mike remains a very significant holder of ~10%

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

I'll never understand why companies release their results just ahead of market open or, worse, during market hours. For me, the gold standard is after market close on a Friday (although i know not everyone agrees). My reasoning is that it gives investors the most time possible to digest the results before trade resumes. In other words, it helps ensure 'the market' is as informed as possible. At least do it after 4pm.

Stealth decided to do it at 3:30pm.

It really isn't a big deal, but one of those small things that irks me.

Aaaanyway..

My initial thoughts in regard to the results were 'ok'. Although things seem to be more or less on track.

The revenue growth was a bit 'meh' at just 2.4%. In fact, comparing H2 last year to the most recent 6 months, revenue slipped 2.4%. All the growth came from H1.

Actually, it's a bit worse when you strip out the $1.9m revenue contributed by Force, which provided one month's worth of sales due to the timing of the acquisition. FY organic revenue growth was just 0.7% when you factor that in.

Stealth put this down to inflation and higher rates, which they say dampened demand. Fair enough, but they have previously talked up how non-discretionary their products are.. hmmm

The gross margins did improve slightly, 29.6% vs 29.4% supported by "operational initiatives focused on margin protection, inventory velocity, product profiling, and rebate uplifts, collaboratively with both customers and suppliers." Good to see.

Importantly, the EBITDA margin improved to 5.3% from 4.8% (in fact, slightly better on an underlying basis if you strip out one-off growth related investments). Also good to see a big jump in the return on funds improved, and an uptick in the ROE. Cost of doing business likewise improved.

This is all evidence of sound operational performance and gives credence to what Mike and the team have been saying for some time.

The cash balance increased 31%, but part of that was a drawdown on their facility. And while debt was reduced by 33%, that's only if you exclude Force (which had $5.9m in working capital debt). Still, they seem to have been able to reduce leverage associated with the existing part of the business and still paid a maiden dividend (although, as others have said, i'd prefer they keep the cash at this stage of their development).

So all told, we saw a 50% boost to NPAT, but there are more shares on issue post Force. So we need to look on a EPS basis. And we should also consider things pro-forma.

If we assume Force was held for a FY, we could thumb suck a pro-forma EBITDA of closer to $8m and an EPS of closer to 2cps (very rough estimate). But that's a good improvement on FY23's 0.9cps and puts shares on a PE of ~12

And they have again reiterated expectations for FY28 revenue of $300 million at an 8% EBITDA margin. That'd be something in the order of 7-8 cps in EPS, which is obviously a lot of growth from here (IF they can deliver). Acquisitions are clearly a part of this -- they say about a quarter of the extra $141m in revenue will come from acquisitions. So that's something to be mindful of (acquisitions dont always work out!), but good to see that organic growth is expected to do much of the heavy lifting.

I'm still a bit uncertain about Force, and the lack of any organic revenue growth is a bit concerning. But shares remain cheap (if you assume no further deterioration in earnings from cont. operations) and they have made measurable progress on their efficiency initiatives.

Happy to hold for the time being.

(I'd welcome a sanity check on any of this -- i did this in a bit of a hurry)

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.

ASX Announcement

As some of us here speculated, Mike and Co. got their knuckles rapped by the ASX for their clumsy price sensitive disclosures earlier this year.

Seems like they engaged some professional advisors for assistance and have updated their Continuous Disclosure Policy. Yay.

I could have told them for free. Only release price sensitive information first via ASX Announcements, and don't disclose ANY significant new information on dodgey investor platforms. (You're welcome. The invoice is on its way.)

Disc: Held

Buyer have dropped off significantly this morning:

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.

Any Ideas on the trading halt.

STEALTH GROUP HOLDINGS LTD

Security Code: SGI

Pause in Trading

Trading in the securities of the entity will be temporarily paused pending a further announcement.

Wonder what this is about ?

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

Since it has been a bit quiet on the SGI front I thought I’d post a letter from EGP capital (who show up on the register as National Nominees Ltd).

They have been trimming their position recently but their forward analysis sounds quite bullish to me:

https://egpcapital.com.au/wp-content/uploads/2024/04/2024_03.pdf

(SGI commentary starts around halfway down page 3)

Sorry, I've been focused elsewhere today, but does anyone know what happened to:

"The Company will release its first-half investor presentation on Thursday 29 February 2024"

which was promised,...errr.... only yesterday?

[Draft advice to CEO - forget about Share F******* Cafe - and focus on delivery of communications via ASX]

$SGI has officially released their 1H FY24 Results.

ASX Announcement

Results identical to those presented on the 16th. So no new commentary required.

The funny thing is, this announcement was tagged "Price Sensitive". Its funny because this time there isn't any new information. Whereas, last time there was new information and it wasn't tagged. In fact, it wasn't even released before the presentation.

Oh dear .... more Hanlon at play, I fear.

Overall - a good result, nonetheless. Investor presentation tomorrow.

Disc: Held in RL and SM

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.

If anyone is interested Mike Arnold is appearing tomorrow in the ShareCafe Small Cap “Hidden Gems” Webinar at 12:30pm AEDT.

https://stealthgi.com/wp-content/uploads/2024/02/2681574.pdf

Being my largest position on SM and RL (outside Bitcoin) sharing some thoughts on Stealth Group upcoming H1 and for the full year.

Overall to keep the thesis in check looking for positive momentum in respect to

• Revenue, 10%+ growth
• Growth in gross profit from 29.3%,
• EBITDA expansion 5% or higher,
• NPAT over 1%
• Inventory held looking for this to further reduce to 13.0% or lower as a % of revenue
• From a cost of doing business (CODB) similarly looking for this remain or fall beneath 24.3% as a % of revenue
• Free Cash flow growth of 10% to 6.6million or higher
• Debt to be reduced from 7.2m paving the way for a
• Dividend to be paid in H2 , 20% of H2 FCF or 0.65c

What to watch :

• Acquisition, which may be needed to propel revenues to the 2025 target of 200m . If announced looking to be purchased for 2x EBITDA .

Operationally, will be keen to see the continued positive trend in

• daily transaction volume ,
• average sales per order
• average sales per employee
• private label sales growth to 2.5% or higher of total revenue
• update on the price reset process and check in re any loss of customer

Specifically these results would be strong pass for the H1

• Revenue 59m, 12% up on LY
• Gross Profit Margin 31% = 18.3m
• EBITDA 6% = 3.54m
• NPAT - 1.5% = 885k
• Debt to be reduced from 7.2m
• Confirming a dividend to be paid in H2

Similarly strong results for the full year 2024 would look as follows :

• Revenue 125m
• Gross Profit 32% = 40million
• EBITDA 6% = 7.5m
• NPAT 1.5% = 1.875m
• Dividend 30% of H2 FCF 990k or 0.98c per share
• Debt below 5 million
• Shares on Issue 103.5m

Any insight or thoughts would be appreciated

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.

Further to @Tom73's straw, here are the notes I took at the AGM today.

I won't summarise Chairman Chris Warton's address, which you can read here.

Mike gave up an update presentation which had some usefuly information. I'll focus on two elements:

1. FY24 Trading Update
2. Update on Strategic Initiatives

Overall, he was his usual matter-of-fact delivery style, although at the start he indicated his delight at the recent share price progression, and clearly sounded more upbeat that the progress they are making is getting recognised.

1. FY24 Trading Update

The Trading Update gave information on the 1^st four months of 2024.

The chart below shows how the segmental split of sales has evolved, with two views presented: product segment and customer segment. The shares of workplace, safety and automotive segments have all increased slightly at the expense of industrial. On the right of the chart, Mike noted that declining share of Retail and Trade and Other (“small end of town”) customer segements is consistent with the overall trend they are seeing in other businesses.

In the next slide below from Mike’s presentation, it is titled “Highlights - year in review” but it has some relevant current year insights, which I will explain below.

Mike noted that on sales revenue in 1H FY24 vs FY23, they achieved 15% EBITDA “received on additional sales” – this is a key metric Mike has referred to in the FY23 results and, also, I think in his Strawman meeting. Given their statutory EBITDA Margin in FY23 was 4.8%, this would indicate that operating leverage is coming through as Mike has indicated it would. Should this trend continue, it will drive ongoing margin expansion over time. And Mike discussed this in terms of their target to achieve 8% in FY25, and also its significance in terms of their target range of achieving 10%-15% EBITDA margin on all incremental sales into the future. Good to see the evidence showing through.

On scale benefits, Mike described how the centralised purchasing office is achieving scale benefits. This is achieving a 2% to 4% uplift in margin, equating to $1.3m NET, with most of the benefits starting to flow in January / February.

Of the 8 new contracts signed last year with customers, 2 will start in March and 1 in May, with pre-determined order values with purchase orders supplied. One is for $6m for a supply over a two-year period. Mike said “We’re getting invited for big tenders, we’re winning those big tenders. And the investment we’ve made in technology has allowed us to onboard large customers now that we have an EDI linkage … which means that every order they supply to us comes automated instead of via email or via phone and then we manually have to key that in.” So, he said this is driving the people efficiency metrics, which I’ll show below, 2 slides down.

The trading update is shown in the next slide.

Against the 1H revenue target range of $55-$59m, they are at $39.0m after 4 months.

So, by my maths that's 68.4% of the mid-range with 67% of the time elapsed. (But I have no idea what the seasonality is towards the year end, so I can't read anything into that.)

Looking back at the same time last year, their 4 month result of $36.0m ended up being 68.7% of their 1H FY23 result of $52.4m. So they are pretty consistent.

The $39.0m represents +8.3% over the PCP.

So, overall, they appear on track for revenue to be within the 1H guidance range.

On costs, Mike spoke about some of the wage inflation challenges and said “our costs have increased roughly 7.4% since 1^st July.” The are clawing this back in the "pricing reset program", mentioned at the FY23 results, however they are only 17% of the way through this, so there is still margin “uptake” still to come. Mike said “we are receiving more gross profit per order and that will obviously benefit us as well when our results come out.”

Mike noted that 1H represents about 42% to 45% of the FY result so, from his perspective, he considers that they are “sitting ahead of plan, which is encouraging.”

Mike then showed the comparable per day metrics over the 1^st 4 months FY24 compared with FY23, slide shown below.

I note the daily sales are higher than I calculated in the pcp comparison in my analysis above. Overall, these metrics are encouraging.

I haven’t tried to calculate the potential EPS – slightly tricky with the FY23 result coming off a small base. But they should be making decent progress off these operating metrics.

Encouragingly, the overall business progress appears to be holding consistent with the “non-discretionary” banner that both the Chairman and MD tout.

2. Update on Strategic Initiatives

Mike called several strategic initiatives:

Loyalty Rewards Club, which gets rolled out in March. They hired a couple of people with experience doing this elsewhere, and expect it to drive both revenue and profit.

Launch of a Superstore format, coming first with a redesign of the Brisbane facility, and then will be replicated elsewhere. They are getting support in merchandising and fitouts from suppliers, so not having to bear the full cost. Four other locations have been identified for refurbishment and fit out.

Consolidating Skipper Transport into Heatleys to create a new category format of “Safety, Industrial, Automotive”, something Mike says he saw in the US, and where he perceives there to be a gap in the Australian market. By December the two current ERPs will be integrated onto one system – “quite a significant investment that we’ve made”.

Launch of a Hire Business operation, already operating in Queensland, but to be rolled out across the network focused on the “smaller end of town”. It covers tool, equipment, and lighting, and has alongside it the sale of all the consumables, PPE etc. that are needs for any hired equipment operation. Mike spoke about the attractive metrics, with payback on investment in the first 13 weeks, whereafter revenue drops straight to 100% gross profit, and then items are sold after a further period to recover value.

My Overall Takeaways

Good progress showing through on a range of metrics and very consistent where Mike indicated the business would be heading at FY results and at the SM meeting.

I have only a small position, which I am minded to increase, but will wait to see if there are opportunities to do better than today's SP.

Disc. Held in RL and SM

Mike was clearly pumped by the recent share price performance so spoke with conviction and pride of the business's operating performance. Someone else will have to cover the detail and the Chair speech, I missed parts due to an annoying phone call.

The key take away for me was the 60m organic sales growth opportunity that will get them to the 200m sales target. I asked Mike about how they expected GP% to change as they took this up because I wanted to understand the quality of the opportunity. His answer was far better than the question and said with confidence and clarity that gave me an appreciation of the depth of work they have done in analysing the opportunity and understanding how their business will change in taking it up.

The essence of the response was that they don't look at it from a GP%, they look at NP% because they consider the whole of business effect from logistics, stock levels, cost to server in implementing it, etc and there are a variety of GP% for parts of the 60m but the end goal is NP% growth. Hence they are not just looking for top line growth to trickle down, but operating leverage on top of that. Which was a consistent theme when he talked about operations and things like store closures and the amalgamation of the Skip brand under Heatleys.

SGI has become my largest position but if I wasn't concerned about position weighting I would be a buyer at current prices. My valuation is north of 70c and assumes far less sales growth and lower EBITDA% than they continue to guide towards. I don't expect a price anywhere close to this for several more years at least, with a hell of a lot of volatility on the way.

Disc: Own RL & SM

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

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

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 . . .

Now that I have a bit of time today I thought I'd go through this one and play Devil's advocate.

My question is has anyone asked what sells and doesn't sell?

Or what segments are performing well and which ones aren't?

Seems a very diverse range of products but there is not much info on what is doing well and what isn't.

This is what is holding me back from Stealth at the moment when I was doing a comparison with Maxiparts.

As mentioned yesterday, @Strawman's and @DrPete's enthusiasm for $SGI spurred me into a deep dive into the numbers of the business. In this straw I outline the potential earnings and cash flow leverage the business has to modest organic growth and margin improvement. It’s not a valuation, as such, but more like a sensitivity analysis that indicates the very material upside potential of the business.

 After reviewing the SM meeting recordings and recent company presentations, some key facts stand out:

• Revenue has grown steadily at a c. 15% CAGR over the last 4 years through a mix of organic and inorganic growth;
• Consistently profitable at Statutory NPAT level;
• Broadly cash neutral over 2019-2022, with 2023 a breakout with FCF of >$5m (although partly due to a higher than normal level of payables);
• Lean IT-system investments enabling adoption of best practice inventory management and (in future) dynamic price management; and
• Capital light model as majority of stores are partner-owned-and-operated.

However, what stood out most of all (and in fact really piqued my attention) was CEO Mike Arnold's assertion that their existing partners purchase some $60m of sales from the top 5 current $SGI suppliers but currently outside of the $SGI umbrella.

In valuing any business, I try to understand the quality of the organic revenue engine - particularly that which is accessible without significant new investments. So, I present below a set of scenarios out to 2027, to estimate the 2027 earnings, calculate value/share based on p/e ratios of 8, 12 and 16, and then discount these at 11%p.a. back to today to get some sense of the current value.

While about it, I consider a larger set of scenarios as follows, with further comments below on why I have chosen these:

• Annual revenue growth of 8%, 10% and 12% FY23 out to FY27
• %GM at 30% in F24 increasing progressively to 31% by 2027 (and 31.5% in the 12% revenue growth scenario)
• % Cost of Doing Business starting at 24% and falling progressively to 23% in FY27 (22% in the 12% revenue growth scenario)

Comments on values selected:

• Revenue: even in the highest 12% p.a. growth, this only takes 2027 revenue to $175m, so the lion's share of revenue growth could potentially be achieved by progressively capturing more of the potential partner volume from existing top 5 suppliers. This is an organic scenario and doesn't assume any network expansion.
• Gross Margin: with increasing volumes, better deals will be struck with suppliers. In addition, Mike has said they are going to add higher margin (albeit lower value) white label lines. Finally, the benefit of recent price increases initiated part way during FY23 are yet to show through, albeit they will be eroded by price and cost increases. So, the %GM margins are modest, and might even be improved upon. The table below shows the %GM in FY24 ("%GMi") and this improves incrementally and linearly to achieve with "%GMf" in FY27.
• Cost of Doing Business (CoDB): this assumes good cost control and it picks up on Mike's target that they can get from 24% to 19% over time, and that now incremental volumes are attracting a <10% incremenal CoDB. So, again, the range of scenarios is modest. The table below shows CoDB/Revenue(%) starting at "CoDBi" in FY24 (which is 24%) and reducing progressively and linearly each year to reach "CoDBf" in FY27. I assume there is greater leverage potential in the high revenue growth assumption.

I assume receivables, payables and inventory all scale with revenue (actually they should scale more slowly for a given network), and that other P&L, cashflow and balance sheet items scale with increasing Cost of Doing Business. However, I do assume a significant ongoing investment in systems, with FY24 (PPE+Intangibles) of $6.2m and scaling annually with CoDB. Mike will need to continue to make prudent systems investments to maintain an efficient, scalable operation.

With long term debt falling to zero, I assume the financing continues to be a revolving facility to fund progressively increasing inventory - the major balance sheet item. Interest rate of 7% is charged on Leases and Short-Term Financing.

I don't model any accumulation of free cash, so as far as the model is concerned all free cash is paid out and does not earn interest, but I have not tested this against the potential payout goal to achieve 5% yield, although the FY27 FCF looks pretty healthy and is lower than you might expect because I have a fair chunk going into Intangibles (IT Systems).

In essence, therefore, the modelling indicates the earnings and free-cashflow leverage over the next 4 years as $SGI passes through its inflection point.

Model inputs and results are presented in Table 1. I've then plotted the calculated $/share in three curves in Figure 1. Each curve lists the 9 scenario results for each P/E ratio. Assuming each scenario has an equal likelihood, results are plotted as an implied probability function.

TABLE 1: Scenario Inputs and Summary Results

To get your eye in on the graph below, the three results, 1.1, 2.1, and 3.1, show the effect of revenue growth and P/E expansion only, without any margin improvements.

FIGURE 1: Modelled Valuations for Each Scenario at a Range of Assumed P/Es

(Note: labels on blue line relate to scenario number; labels read across horizontally for orange and grey P/E curves)

Discussion of Results

First, I am not pretending to have properly modelled the value of $SGI. For sure, I have no doubt that Mike will continue to pursue both organic and inorganic growth, with the prospect that over the next 4 years revenue growth will be higher than I have considered. After all, the current target is to get to $200m revenue by FY25! (Good luck) Because of that, I don't think margins and cost of doing business will advance in the smooth way that I have assumed. If $SGI try to acquire their way to their targets, CoDB will likely go backwards before it improves.

However, I still believe the analysis is instructive because it confirms the following:

1. Material growth in value does not rely on driving revenue to achieve the FY25 "target"
2. There is a lot of leverage to modest improvements in margins and control of costs
3. Investments in technology to continue to support business scalability can yield significat returns, particularly if $SGI can continue to achieve a lean off-the-shelf approach to adoption of systems
4. The existing partner volumes that currently lie outside the $SGI supply chain are a very valuable prize.

Remember, all of this assumes that most of the growth will come from bringing much of the current $60m of purchases by $SGI’s partners from $SGI’s top 5 suppliers that is currently outside $SGI’s scope. Of course just because Mike is targeting this doesn’t mean they’ll get it. For example, perhaps current partners are obtaining these supplies via one of the category-focused market leaders (think workwear and PPE, autoparts etc.). These suppliers may already have a scale that means $SGI cannot offer better value. Time will tell. But this is one reason to consider this analysis a sensitivity analysis and not a valuation or prediction.

Key Takeaway

While my methodology and assumptions are very different to @DrPete's, the conclusion is the same. If $SGI continues to be well-managed driving a balanced approach to revenue growth, returns and operational efficiency, there is a very significant multi-bagger upside.

Risks? Of course there are several. Industrial MRO is a mature market and although $SGI highlight the huge market scale, there are existing players with 10-20x SGI's scale, including category specialists. It is easy to code incremental margin improvements in a spreadsheet, but not so easy to do deliver margin improvements in practice in such a market.

Moves by competitors to grow or defend share or existing partners defecting from the "$SGI consortium" cannot be ruled out. In fact, this potentially becomes more likely as $SGI continues to scale and improve its own margins. In my sensitivity analysis these downsides are not considered. So beware.

As ever, anything but the most modest of acquisitions would also be likely to muddy the waters, even if it expands the network and volumes which will ultimately deliver returns if $SGI continues to execute well.

So What? After All This Analysis!

If pushed, I’d venture that $SGI is fairly worth anywhere between $0.20 and $0.30 today. Over time, however, if it sustains a strong earnings growth trajectory, there is significant further upside if it re-rates to achieve growth stock P/E ratios. (A good comparator case study would be $SNL.)

So, I have voted up @Strawman 's valuation of $0.23 from 4 months ago.

-------------------------------------------------------------------------------

P.S. This morning, I pushed my order up to $0.155, and it cleared. Now looking a wee bit thin on the sell side!

This presentation was marked as market sensitive, but I really can't see anything new here that you'd class as material and undisclosed.

One small point, this looks like a bit of a chart crime:

Maybe i'm missing something, but shouldn't that dark blue square should be only 23% larger in area than the light blue..?

Poor old SGI just can't catch a bid. Not the results were bad -- far from it!

On a statutory basis, revenue was 11.4% higher, (or over 17% if you just look at continuing customers). Revenue for continuing operations has averaged 29% per year over the last 3 years.

It's also lifted prices recently, which it expects to boost future profits, and has reiterated its non-discretionary nature as an 'all-weather' distributor.

As you go down the income statement, things get more interesting, with some real operating leverage starting to emerge.

• EBITDA was up 32.5%
• Pre-tax profit was up 85.7%
• and NPAT was up 50% (51.7% on a per share basis)

The cash balance improved significantly to 7.7m and net debt dropped almost 30% to $7.2m. Free cash flow was +$5.6m. So they seem well positioned to start dividends as promised.

The company has an Enterprise value of $19.7m, so it's on a EV/EBITDA of just 3.7x.

The PE is 13.2.

There's not a huge amount of detail in the ASX Release, but I'll try and line up another meeting with the CEO to see if we can get some more insights.

Disc. Held

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.

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.

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

Thank you @Slideup and @Strawman for your notes on the H1 presentation, very helpful addition to what I got out of it. I will only add the impression I got that Mike (CEO) was very much in sell mode to drive the share price up (eg FY24 dividend…maybe). Not an all together bad thing but I think he over embellished on a few points. In particular I do not agree that Operating Cash flow or FCF are in a good spot, if you factor in lease principal payments (which for their business is a significant opex) FCF is +0.1, not +1.2m as shown on slide 11 and Op Cash is +0.7 not +1.7 as shown on slide 19.

Also, I am taking with a grain of salt that 95% of items sold are non-discretionary until we go through a downturn and that is proven. A global recession and pull back in business investment and commodity prices may test this theory for their customer base. I am sure they won’t be too badly impacted, but they will not be 95% immune.

Probably not big points to make, but I would prefer a more objective/frank view from the CEO which to my mind still has more than enough positive and avoids them feeling the need to focus on short term expectations to meet the hyperbole. As a shareholder I sympathies with his frustration at the markets indifference to valuing the business, but the numbers will do the talking when they start delivering them!

Outlook

None the less the company looks like it is pivoting from around break-even top line growth into what could be very rapid operational profit growth if it can deliver the margin expansion. However that also seemed imminent when @DrPete123 introduced it to the SM community – and I agreed with him and bought a small position. I note they still have the 8% EBITDA target for 2025 and sales have gone from 70m in 2021 to a likely 110m for 2023, mostly due to acquisition. So, I retain my faith in them and acknowledge they are very well positioned to reach that target especially if they can get the margin expansion talked about from acquisition integration, synergies, consolidation and leveraging their buying scale. 

A lot can go wrong with all that they are doing, and a recession will provide a headwind, but all the ingredients are there and their new scale should provide economies to expand margins one way or another as they absorb the acquisitions. So, let’s look at what happens if they meet there target or even get close:

Valuation

I have valued using a two methods, DCF at 10% and discounted PE of 15 from FY28 forecasted EPS figures to get the values. Assumptions for each noted.

Bull Case ($1.30-$1.37): They meet guidance of 25% sales growth and 8% EBITDA by 2025, then 10% pa Sales growth to 2028 terminal year and terminal EBITDA% of 10%. I doubt this will be possible without acquisitions which may require dilutive capital raises and impact on this valuation.

Base Case($0.60-$0.72): 10% Sales Growth to 2028, EBITDA% 6% by 2025 and 8.4% by 2028 terminal year. They have talked to a target of 10% organic growth, so assuming that they can do this and find margin efficiencies they have highlighted then I think this is achievable. For this scenario I assume capital rases to fund acquisition have a net zero benefit on a per share (ie dilution offset by additional growth)

Bear Case ($0.12-$0.23): Assume that sales grow at 10% still but efficiencies are minimal and EBITDA% only get to 4% by 2028. 

There is of course a case where it’s worth zero, where operational complexities add cost and recession or other external factors keep profits from growing or send them negative. The debt levels could also be a cause of business failure for reasons that may not be clear currently.

That said, I see SGI currently at a price of $0.12 as undervalued on a large range of possible outcomes and an asymmetric bet on the future. Not a lot needs to get better (only small margin growth and modest sales growth) to justify much higher values. 

Disc: I own SGI, having bought in Oct 2021 and have topped up recently following the H1 result, but that took 2 weeks given the lack of liquidity!!!

Side Notes on Reporting Matters

Inventory: I agree this is improving, but I don’t like it reported as a % of Sales, it should be a % of COS, that way movements in margins don’t impact your stock turn figures. Example is FY20 Vs FY22, Inventory measured as % of Sales was unfavorable 18% (11.6% to 14.2%) but as a % of COS was unfavorable 22% (15.8% to 20.3%)

Debt: I like the detail of the debt brake out, also the articulation of its use and management in the call. They are clearly and appropriately managing this closely which is great to see, and I think debt levels are reasonable currently, but I would be concerned if they grew from here. The splitting out of acquisition debt is informative but I don’t want to see an emphasis of debt excluding acquisition (inc WC support) as something that is highlighted as though the debt isn’t real debt (what is with Capital Risk Ratios that exclude acquisition debt – p22 of the H1 FY23 rep – maybe loan covenants metrics)!

I listened to the half webinar from Stealh and walked away thinking that they really are a quality management team, althought the scottish accent on the CFO was a bit thick for me to catch every word.@Strawman has given a good summary but a couple of things that jumped out to me. I didn't realise that Mike was the original preo IPO founder of this buisness.

The potential dividend (end FY2024 earliest) will partly be enabled through the repurposing of the interest/repayments that they are currently paying off from the CBA facility. They are paying $410K/qrt which will be paid off by the 30 June 2024. This in addition to the increasing revenue and margin will underpin the dividend. Did make the comment that they have been prudent capital allocators to date and this is compatable within that framework. They don't see a problem with balancing the capital required for continued growth, debt repayments and shareholder returns through dividends.

Also talked about them still being a growth company and how interest repayments are increasing which is not the best use of shareholder funds. I got the impression that if the SP goes for a run they will look to raise capital to pay down their debts. I don't think this is a bad strategy, depending on the raise price off course. A raise would probably coincide with them taking on an another acquisition but I would be very surprised if this happened before 2024.

What does impress me about the managemeam is that they understand what their end goal and how they are steadily executing their plan to get there. This is a company that understands it's niche. While the SP doesn't currently reflect it they have built a very solid base. If we compare where this company is today relative to where it was when @DrPete did his video a few years ago, it really is chalk and cheese. I am increasingly confident that their margins will expand and the bottom line will improve.

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.

I’ve been looking back on some previous SGI straws and found a Management straw posted by@wtsimis 4 months ago after the AGM. It always good to look back at the promises!

“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.”

Mmmm, $2.2 million added NPAT for FY23? Is this still feasible?

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

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

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). 

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.

I thought some people might like this feedback on a user experience of C and L tools- a buisness Stealth aquired in Nov 2020. I have used them (online retail portal) both prior to and after Stealth aquired them and have always had good experience and generally prefer them to the other big box tool shops.

I bought a new grinding wheel a few weeks ago and it came damaged, either in transit or prior to shipping, I contacted C and L by email, which was internally forwarded onto the purchasing department manager -- which I was thinking could be the start of a dodgy runaround, but I was pleasantly surprised when I received an email yesterday that a new item would be shipped and then a text msg later that day when it was sent. Overall a very painless returns and replacement process and pretty good comunication.

I think it supports the view that Stealth do their aquisition and integrations well. Keep the customer happy and they keep coming back!

Share cafe research report and discussion this Friday

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 . . . 

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.

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.

Thanks DrPete123.

Will watch with interest to see how this unfolds over the coming weeks.

@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?

Late this afternoon a sell order of over 1.2m shares of SGI was placed @ .12c. The seller withdrew offer at the close putting the share price Buy / Sell split at .115c / .14c and total volumes on market $738k B and $251k S

Interested to know any insights into whom is behind this move?

This is a low liquidity stock with traded stock over 1m shares only occurring 3 times over the past 15months .

Not sure if we are seeing shift in shareholder base but something i would be keen to get others views on and also ask Mike Arnold the question next week in the meeting .

Specifically a Narelle Edmunds has taken a 10% plus stake in SGI over the past 18months buying at price points of .12c to .16c.

Any insights would be appreciated.

Disc: Held in RL and SM

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.

@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).

Great preso Pete. my 2c for what it is worth.

Distribution companies are usually cost of capital biz's at best with a few good ones eg BAP and a very few exceptional ones eg REH. so why the difference?

great customer service is a given, any co not servicing their customers will be out of biz or struggle for years. what else?

there are 3 things IMHO

REH built its strength on savvy exclusivity deals. now why a producer would sign these is something to contemplate,-- better volumes, increasing their share as the distributor outperforms is the attraction. so the arrangement becomes of mutual benefit.

Scale is important, as volume discounts and bargaining for exclusivity can be put on the table. i followed the ANN and Grainger tie up. ANN willing to forgo margin and some product exclusivity to Grainger, Grainger guarantees volumes that underwrite share gains. have to be big and good to get these deals, like Grainger is.

the last point is more difficult to describe and identify and depends on the product being supplied, its importnace, its volume used/availabity, and ability to source and deliver that puts some bargaining power in the hands of the distributor. if a business is built around a good set of products that are specilaised or have some other attractive chracteristics then a better than cost of capital return can be sustained by the distributor.

in summary i think for SGI depends on how well it acquires add ons. if it does well it will scale (which is reqd) and can better its competitive position, if it buys a dud it can go backwards quite quickly.

good luck on the journey