As i do a partial reset on my portfolio, i'm going to restate the investment thesis for each holding over the coming weeks. For Stealth it is as follows:

Big Picture

Stealth is basically a distribution engine. Its whole business is about moving industrial, workplace, and consumer products from suppliers to customers — faster, cheaper, and more efficiently than the next guy. The faster and cheaper they do it, the better the margins and cash flow. The bigger the volume, the bigger the revenue base.

The growth play here is simple (in theory):

- Sell more stuff.

- At better margins.

- Sweat the fixed assets harder (better warehouse/store use).

Every dollar invested (whether new capital, retained earnings, or debt) needs to push those levers and deliver a strong return.

Some Key Insights

Low-margin, high-turnover game

Half their assets are tied up in working capital (mainly receivables and inventory). If inventory turnover slows, it balloons working capital and tanks ROA. Worse, slow-moving stock usually ends up discounted, wrecking margins. They finance some inventory with debt at ~7% p.a., so if turnover isn’t tight, the carrying cost eats into profits fast.

Wide SKU base makes inventory tough

Tens of thousands of SKUs! Great for customers, brutal for management.

Managing such a wide and deep product catalog creates a constant balancing act: maintaining enough stock to meet customer expectations without tying up excessive capital or risking obsolescence. Every product line needs active oversight on turnover rates, gross margins, seasonality, and supplier terms.

Without disciplined inventory control — leveraging real-time data and predictive analytics — bloat creeps in fast, working capital balloons, and ultimately, margins and cashflow suffer. The operational complexity multiplies as Stealth expands into more categories and retail channels, making IT systems, demand forecasting, and inventory analytics absolutely critical to maintaining efficiency and profitability.

Non-discretionary core product offering

Most of what they sell (safety gear, tooling, automotive parts) isn’t optional for customers. Stealth Group states that over 90% of the products they sell are considered non-discretionary items​​​.

Think things like safety gear, industrial supplies, automotive parts, and workplace essentials. The kind of stuff that customers need to keep operating day-to-day, even in tougher economic conditions. This gives them a resilience edge...to a point. If their customers (mining, construction, trades) go through a slowdown, and these are very cyclical sectors, volumes will absolutely still get hit and net margins could collapse.

IT and ERP systems are the secret sauce, hopefully

Good IT is non-negotiable here. Their ERP system needs to manage tens of thousands of SKUs across multiple divisions in real time — flagging aging stock, managing dynamic supplier pricing, and enabling better demand planning. In FY23 and FY24, Stealth invested around $2.8 million into technology, automation, ERP upgrades, and digital customer channels.

Specifically:

Consolidating ERP platforms across Heatleys and Skippers to centralise buying and improve inventory demand planning.

Launching AI-driven customer service platforms, now handling 95% of industrial support queries.

Expanding cybersecurity, e-commerce, and digital sales channels.

Automating distribution centre operations to improve order speed and accuracy.

Management views IT as a strategic weapon, not just a cost center, with a strong focus on "simplifying work" and "delivering superior customer experience through data, digital and automation." IT, data, and automation are now core pillars in their FY28 strategic plan, supporting a scalable, higher-margin business model. As they scale revenue and SKU complexity, these systems will be critical to protect margins, speed up cash conversion, and support future acquisitions.

ROE is modest and debt-aided

ROE sits at 6.1%, reflecting a business that is still sub-scale.

A DuPont analysis is helpful here, breaking ROE down into three drivers: profitability (net margins), efficiency (asset turnover), and leverage (equity multiplier).

For Stealth:

• Net Margin: 1.2% — extremely tight, highlighting limited pricing power today.
• Asset Turnover: 1.34x — solid but room to improve through better inventory and sales efficiency.
• Equity Multiplier: ~3.8x — moderate use of leverage to boost otherwise low returns.

So, at present, it’s primarily financial leverage doing the heavy lifting. To unlock the Bull Case ROE improvement, Stealth must:

• Expand gross margins through own-brand sales (like RIVO) and improved supplier terms.
• Accelerate asset turnover by increasing sales faster than growth in working capital.
• Maintain disciplined leverage to ensure operating gains — not debt — drive higher returns.

Basically: sustainable ROE improvement will need to come from capable operational execution, not just balance sheet engineering. Stealth has built the IT, logistics, and branding foundations...now it’s all about delivery.

Reason for optimism

Stealth has been more or less consistent in its messaging and we have started to see encouraging signs of unfolding operational leverage -- something that hopefully becomes more obvious now that underperforming stores have been closed down, the various business units have been streamlined and the new IT systems are delivering clearer insights.

The recent institutional raise, while annoying it bypassed retail shareholders, gives them cheaper capital, a stronger balance sheet and should also improve liquidity (which might open Stealth up to bigger capital managers). It also represents a sign of confidence, especially given the tough environment for capital markets at present.

A maiden dividend, improved cash flows and better inventory/revenue ratio are all encouraging. And management has an ambitious target -- even getting close to it should reveal a big uplift in profit (see below)

Risks

- Execution risk around inventory management, accounts receivable and general working capital.

- Margin pressure if own-brand products (like RIVO) underperform.

- Customer concentration in cyclical sectors. A downturn in customer activity could really knock the wind out of their sales

- Leverage risk if sales slow but debt obligations remain. Could force a costly cap raise.

- Poor acquisitions could really derail things -- not only in wasting capital in the purchase and integration, but also in management time and focus

What does growth look like?

Well, if we take management's targets at face value, you're looking at a FY28 revenue and EBITDA of $300m and $24m respectively. Ideally, that's be an NPAT of ~$14m or so. That compares to a pro-forma NPAT in FY24 (assuming a full year contribution from force) of roughly $3 - 3.5m or so.

But if we knock back the revenue target to $250m, and give it a 6% operating margin, and a 3.5% net margin, NPAT is closer to $8.8m. Still a big jump over three years, but could be further reduced by an increased share count.

Avoiding the specifics, the point remains that there is still an asymmetric upside if they execute well -- even if they fall short of these ambitious targets.

What to watch

Operating and net margins MUST trend higher:

Margins are tight today. Gross margin expansion through own-brand sales (like RIVO) and better sourcing deals must drive operating leverage. Watch quarterly gross margins carefully.

Organic top-line growth is key:

Acquisition growth is useful, but organic growth is the real acid test. Watch same-customer sales growth and contribution from online/digital channels (not just total revenue).

No bloat in working capital:

Monitor inventory days and receivables turnover closely. Bloating here would signal operational discipline slipping and would sap cash flow.

Improved ROE:

ROE must rise through higher margins and faster asset turnover — not just by leveraging up more debt. Look for rising returns on both invested capital (ROIC) and equity.

Sensible, bolt-on acquisitions:

Acquisitions must be disciplined: small, strategic, and margin-accretive. Watch for any large, high-risk bets (a red flag).

Stealth is undertaking a cap raise. No details as yet.

Acquisition? Strengthen the balance sheet after a strong rally and with macro headwinds ahead? Something else?

I may have, for the first time ever, been lucky with a sell decision. Usually stocks rally after I sell! Although, that's still a possibility...

Ive just updated my valuation for Stealth and came up with a pretty bullish figure of $1.15 (at least compared to the current market price).

Still, i'm noting here that I will be selling down a large chunk today -- purely for portfolio weighting reasons and to free up some cash. I will still retain a very substantial holding, it's just a bit tough to justify the current 30% weighting!

Stealth Global released FY 2023 results at 3pm today and although much was revealed on 14th August 2023 we got a chance to see some of the great work being done by the management team.

What i am finding most impressive is the disciplined approach to doing business Mike and the team are taking which have yielded great benefits over past 3 yrs and set the scene for years to come .

Let me share what i mean.

Revenue growth was 11.4% for the FY to $111 million with the split H1 47% c/w 53%.

This is a acceleration in revenue.

The growth achieved was impressive when you consider the business elected to exit 6.3m in revenue which was associated with unprofitable customers.

The importance this plays long term should not be understated as it allows efficiencies to be realised to drive long term goals to be reached.

This can be seen in the following measurements

• Sales per day increase to $450k in FY 23 c/w $390k in FY22 or 14.9%
• Gross Profit per day increase to $150k per day c/w $110k per day or 31.3%
• EBITDA increase to 5.3m (4.77%) c/w 4m in 2022 or 32.5% increase.

Very Impressive.

Looking into the inventory and expense management and the results are further impressive.

Inventory as a dollar figure increased 4.8% to $14,825,384 when revenue rose 11.4%.

Such results indicate that Stealth value the real estate in their supply chain and ensure stock is working for them and not sitting dormant holding up valuable capital and space. Ultimately this will extend the life of the warehouse facility ensuring products that are profitable come into and out of the business . Finally the operation itself is also a beneficiary of this in terms of processing orders more efficiently and dropping to the bottom line

So what do the numbers say.

• Sales per order rose 17.4%
• Sales per employee rose 19.6%
• GP per order rose 14.2% AND GP per employee rose 36.7%.
• Staff as a % of revenue thus fell to 17.7% from 19.1%
• H1 staff % was 18.3% , H2 staff % was 17.1%

Operationally Stealth efficiency is accelerating as the year concluded and there is clear evidence of the goals regarding 8% plus EBITDA are within reach over the next 2yrs.

Sometimes we take a narrow view of results but stepping back and see the past 3 years Mike and the Team have done amazing job to building shareholder value.

Inventory to sales % 16.1% 2022 to 13.3% 2023.

Remain Bullish and current valuation simply confirms this , Trading at 2.45x to EBITDA and 2.32x Free cash flow.

Stealth Aug 23-confirms-record-financial-performance-in-FY23.pdf

SGI Annual-Report-to-shareholders.pdf

Disc; Top 5 Holding in RL and SM

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.

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.

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

Disappointing half yearly.

Revenue was up against previous corresponding period but down on last half year. $55 -> $52M

PAT was a wafer thin $309k which, on revenue of $52M equates to a net margin of 0.6%.

Cash flow was positive, in fact the best half yearly operating c/f ever, I think, and bottom line increase in cash $383k, roughly equal to the profit.

Was really hoping for a margin improvement but at least they are not losing money. Less than 1% net margin is very thin ice.

Finance costs continue to rise, now at $487 for the half so they look better on an EBIT basis. That debt is getting heavier faster than they can pay it down.

Not sure how seasonal this business is but hoping for better next half.

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

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

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

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

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

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

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

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

Stealth 1H Result Webinar Link:

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

Disc Held SM and RL . Top 5 position in portfolio

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

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

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

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

I would summarise these as follows

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

Optimise store footprints to drive sales and improved margins

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

Continue to win organically via tenders

Cross selling across divisions

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

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

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

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

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

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

Great ann out today with a trading update.

Sales up 22% which aligns with my forecast for FY23 of $120M but good to see them already at this run rate.

Key for the value of SGI is the net margin.

Annual cost savings combined with increased margin and profit from platform enhancements, pricing reset, growing customer activity and improved purchasing terms and supply chain efficiency for the Group is expected to deliver approximately $2.2 million in additional profit in calendar year 2023 ICY 23'. Inventory rationalisation is expected to reduce on current sales levels by approximately $1.3 million or 8.6% of current stock value. 

So this means more profit - higher NPAT margin. The last sentence is not really clear to me. Are they reducing inventory or reducing its rationalisation? Sounds good if they can realise an extra $1.3M in cash flow from this.

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

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

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

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

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

Rev up 101.8m or 46.1% for the year

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

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

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

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

Excluding Acquisitions organic revenue up 21%

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

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

NPAT 2.4m v 400k in FY21

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

Cashflow was 2.2m .

Two areas to watch

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

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

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

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

Share cafe research report and discussion this Friday

SGI is getting some attention.

From ShareCafe this morning, those interested can read the full article:

https://www.sharecafe.com.au/2022/04/14/stealth-breaks-out-from-under-radar/

Held.

I hold SGI.

https://www.blackwoods.com.au/about-us/our-story

Posting an alternate view is not being negative, as long as it is based on fact, not hype. It might be wise to check the competition before shoveling money into any business. The wise words on this forum from others about building a position over time, is something I should listen too.

Blackwoods has been around for 140 years. Several outlets in every state. Websites, hype, money, can't buy years and reputation. I have to take that into consideration when I invest in SGI. Maybe being greedy when others are fearful, is not always right. With investing, I don't think too many rules, are always right. The only two rules I go by, are, If you are right, you make money, if you are wrong, you lose money. Keep it simple.