𝛼SK or SearchStealth Global Holdings Ltd: Well Positioned for Long-Term Growth
Stealth Global Holdings Ltd
Well positioned for long-term growth
Stealth Global Limited (ASX:SGI) has reported adjusted EBIT (which excludes transaction costs and initial BSA investment costs) of ~$0.9m, down from the reported ~$1.9m in FY19. Most of this decline related to higher BSA start-up operating losses (+$0.7m on FY19 and predominantly COVID related), a lower African contribution (~$0.7m on FY19) as this low margin business is exited and significant investment in Australian senior management, ecommerce, and network (~$0.9m) for future growth. By definition this implies a solid underlying result for the core Australian business, which delivered 35% sales growth over the year and the key driver for the 8% group sales growth to $68m. Looking forward, the early momentum of BSA looks to be resuming with solid orders early in FY21 while the impact of the African withdrawal should washout of the numbers, leaving SGI with a much improved gross margin profile. Australia now dominates the group’s sales mix and ultimately the Australian cost base has been set-up for a much bigger business, with future sales growth expected to see significant operating leverage.
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.
Key take outs from the FY20 result & future implications
There are a number of moving parts when assessing SGI sales & EBIT including a deliberate exit from Africa (at one time 30% of group revenue), expected start-up losses from the BSA JV in the UK (100% consolidated so higher than SGI’s true 50% share), investment in senior people and an ecommerce platform for expected growth in Australia, transaction costs in reviewing potential acquisitions, Jobkeeper payments in Australia over Q4FY20 and initial BSA investment costs. With that in mind the delivered FY20 adjusted EBITDA of $1.2m (statutory $0.3m) is less relevant than the group’s long-term potential to leverage sales growth off a cost base built for growth, aided by an improved gross margin mix.
Base case valuation A$0.23/share fully diluted
Our base case DCF valuation for SGI has been lowered from $0.27/share to $0.23/share on the back of more modest near-term BSA estimates and the complete withdrawal from Africa. Our Australian assumptions remain intact with a forecast 8% CAGR sales growth over the next 4-years. SGI is well priced relative to peers on a revenue to sales basis (14% against 24%-27% to the nearest peers based in reported FY20 sales), with demonstrated operating leverage likely to close this gap.
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- Stealth Global Holdings Ltd: Well Positioned for Long-Term Growth22 Sep 2020