𝛼SKStealth Global Holdings Ltd: Complementary Acquisition at a Complementary Price
Stealth Global Holdings Ltd
Complementary acquisition at a complementary price
Stealth Global Limited (ASX:SGI) has announced the acquisition of the C&L Tool Centre Pty Ltd, a market leading distributor of Industrial, Safety and Tooling supplies with a one-stop mega store located in Brisbane. The business has been established since 1969 and stocks leading national and international brands, not dissimilar to Total Tools (now owned by Metcash) or Blackwood’s (owned by Wesfarmers). An investment in online capability is also evident and has been a key driver of recent sales growth. From a financial perspective using the metrics provided we estimate EPS accretion of 65%, 45% and 30% between FY21 and FY23 respectively. We have taken the opportunity to tone-down our BSA estimates given UK lockdown, resulting in a net 39%, 13% and 9% EPS upgrade medium-term. Our DCF valuation as a result has increased to $0.29/share from $0.23/share. Since our last note (22nd September) our assessed small cap distribution peers have rallied between 25% (CYG) and 50% (CLT and FUN), widening the EV/sale discount SGI trades to this peer group before the C&L Tool Centre acquisition is considered.
Business model
Stealth Global Holdings is a business to business distributor of a wide range of industrial, safety and workplace consumable products. In addition to traditional wholesale supply and wide range distribution, Stealth seeks to establish preferred and/or exclusive sales arrangements with suppliers and/or customers, establishing a key point of differentiation with peers. Such arrangements target new markets (such as the Bisley Workwear JV in the UK) or own label (such as the Protect a Load acquisition). Resulting volumes offer a virtuous circle of scale, operational efficiency, margin growth and profit growth.
C&L Tool Centre acquisition & trading update
The C&L Tool Centre acquisition looks very complementary to the core Stealth business, provides a key Brisbane base for Queensland expansion, and most importantly for near- term financials, is strongly EPS accretive. Using an FY21 sales base of $16.4m and EBITDA of $1.4m (10% growth on reported FY20 numbers, below the 25% growth rate for the first 4- months of FY21), we estimate EPS accretion of 65%, 45% and 30% between FY21 and FY23 on a standalone basis. Recent AGM trading update comments for FY21 regarding African sales (down $8m), BSA (much improved) and Group sales (1H21 to be below 1H20, but 2H21 to be above 1H21) are in-line with our current forecasts, but we have taken the opportunity to cut our medium-term BSA sales estimates given recent UK lockdowns.
Base case valuation upgraded to A$0.29/share fully diluted
Our base case DCF valuation for SGI has increased to $0.29/share (previously $0.23/share) on the back of the C&L Tool Centre acquisition. The near-term accretive nature of the acquisition off a low earnings base drives this increase. We would note since out last note in September all selected small cap peers have rallied between 25%-50% and SGI continues to trade at a significant discount to this peer group before adjusting for the sales uplift that comes with the C&L Tool Centre acquisition.
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