Stealth Global Holdings Ltd: Acquisition & Improving Outlook Offer Operating Leverage
Stealth Global Holdings Ltd
Acquisition & improving outlook offer operating leverage
Stealth Global Limited (ASX:SGI) has reported statutory results following their trading update mid-February, and we have fine-tuned our numbers from our update (Underlying sales momentum set to accelerate, February 18 2021) accordingly, with changes at the margin. The key message continues to be the group is well placed to grow revenue and earnings over the next 12-months, driven by 1) easy comparable period sales beginning Q421 (neutral Africa impact, and when Australian sales declined ~20% early in the quarter) and into 1H22 (underlying 1HFY21 Australian sales were down ~7%), 2) a full 12-month contribution from the C&L Tool Centre acquisition, which should contribute ~$14m in revenue (and represent ~20% of group sales) and ~$1.4m EBITDA (>50% of underlying earnings), 3) the BSA potential beyond the UK lockdown, supported by the launch of a new on-line portal, 4) a cost structure which has been built for growth and should not require additional resources to accommodate our forecast medium-term sales growth (promising operating leverage), and 5) the cycling of the exit from Africa, which has been a drag on group margins and comparable sales growth. Subsequent to the 1H21 result release selected peers have reported generally solid numbers (SNL, CYG and CLT), and as a result we have seen a widening in the FY21 EV/sales discount of SGI to the peer group, with SGI trading at a 35% discount to the nearest peer.
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 easy 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 customised for business and the trade should also begin to yield sales, while BSA remains well positioned post UK lockdown.
Base case valuation down to A$0.27/share fully diluted
Our base case DCF valuation for SGI has reduced to $0.27/share (from $0.29/share) on the back of a higher 10-year bond yield assumption (2% from 1%). Most of this value is attributed the leverage of Australian sales growth to a cost base built for medium-term growth. Our numbers incorporate 6%-8% sales growth over the forecast period, and stable to improving gross margins driven by both scale and private label/mix.
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