š¯›¼SK or SearchStealth Global Holdings Ltd: Underlying Sales Momentum Set to Accelerate
Stealth Global Holdings Ltd
Underlying sales momentum set to accelerate
Stealth Global Holdings Limited (ASX:SGI) has provided a trading update for 1H21, with group sales of $30.4m, down $9.3m or 23% on H1 FY20 but up 7.0% on 2H FY20. Stealth Global noted that underlying EBITDA for H1 FY21 was $2.1m compared with $1.7m in the previous corresponding period (pcp). Statutory EBITDA was $1.15m, up from $0.73m in the pcp. Acquisition and investment costs of $0.9m in H1 FY21 ($1.0m in H1 FY20) account for the difference between statutory and underlying. At the sales line, the bulk of the decline was due to the well flagged exit from Africa ($8.2m). Australiaā€™s H1 FY21 sales were $28.5m, down 5.0% on pcp but up ~11% on H2 FY20. We estimate $1.4m in government economic stimulus including Jobkeeper supported sales in the half, similar to H2 FY20. The UK-based BSA Brands delivered $1.09m in sales, an increase of 56% on pcp and well ahead of the H2 FY20 sales of $0.4m, despite ongoing COVID disruptions in the UK. COVID has materially impacted the expansion of the BSA JV in the UK, and the full potential of this business is yet to be realised. Looking forward SGI should benefit from weak 2H20 sales base, with a full 6- month contribution from the C&L Tool Centre acquisition (~$8.0m revenue in 2H21). At the EBITDA line sales leverage to an Australian sales recovery and the C&L Tool Centre acquisition should see solid growth in underlying earnings.
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.
Underlying momentum to accelerate over the next 12-months
SGI will now cycle relatively weak trading conditions in its core Australian base over the next 12-months, beginning Q421, and will be aided a full 12-months contribution from the C&L Tool Centre acquisition in which we are forecasting ~$14m in sales and ~$1.4m EBITDA). Recent investment in on-line capability customed for business and the trade should also begin to yield sales, while BSA remains well positioned post UK lockdown. We believe recent tendering activity supports improved trading conditions in Australia.
Base case valuation remains A$0.29/share fully diluted
Our base case DCF valuation for SGI remains at $0.29/share despite some near-term earnings revisions, as most of this value is attributed to an Australian cost base leveraged to improved sales over the medium-term. We have lowered our WACC from 10% to 9% however to reflect the low risk underlying earnings base. Our selected small cap distribution peer group has rallied between n 50%-150% over the last quarter, widening the EV/sales gap, with SGI now trading at a third of the nearest peer.
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- Stealth Global Holdings Ltd: Underlying Sales Momentum Set to Accelerate18 Feb 2021