Stealth Global Holdings Ltd Contract Wins and Synergies Drive >FY23 Upgrades
Stealth Global Holdings Ltd
Contract wins and synergies drive >FY23 upgrades
Stealth Global Limited (ASX:SGI) has provided a trading update at its AGM which we reconcile with our current forecasts below. Near-term, H1FY22 revenues are forecast at $45m +/- 5%, in-line with estimates ($46.6m). Abnormal (integration) costs have been quantified at $0.76m for the half and have been added to our adjustments in the P&L and cash flow statements. Capex of $0.8m for the half is above estimates and >FY22 estimates have been adjusted accordingly. Medium- term, such investment is paying dividends with new customer contracts representing $18m in “combined annual value” awarded or being finalised and expected to be fully contributing by CY23. This represents ~22% of our current Heatleys/Skipper sales assumptions and well above our current forecasts. We have upgraded our FY23 and FY24 sales estimates by ~5% as a result, which may still prove conservative given expected Skipper revenue synergies. BSA (UK) continues to secure new stockists above current estimates which is a key driver of revenue growth. Given the recent investments in people and infrastructure we expect the majority of these sales to drop to the bottom line, and as a result increase earnings estimates for FY23 by 20-30%. Incorporating higher capex, our DCF valuation increases to $0.40/share (from $0.32/share).
Business model
Stealth Global Holdings is a broad-line distributor of industrial, maintenance/ repair/operating (MRO), safety, workplace supplies and other related products and services. Stealth looks to differentiate with its broad in-stock product offer, supply chain infrastructure, deep supplier relationships and e-commerce channels, serving customers of all sizes. Stealth provides supplies and solutions for every industry through a portfolio of five distribution businesses covering business, trade, retail, service and specialist wholesale. The subsidiary brands are Heatleys Safety & Industrial, C&L Tool Centre, Skipper Transport Parts (STP), Industrial Supply Group and BSA Brands (UK), a joint venture with Bisley Workwear. ~95% of revenue is driven from repeat customers.
H2FY21 underlying momentum should continue into FY22
Our FY22 forecasts (pre-abnormals) remain on-track with H1FY22 sales guidance in-line with forecast. The securing of $18m in new customer contracts (~22% of our combined Heatleys/Skipper sales estimates) is well above our ~6% sales growth estimates, and as a result we have upgraded these estimates by ~5% in FY23 and FY24. Assuming a stable cost base, the result is a 20-30% increase in EPS estimates over the forecast period, which may yet prove conservative given revenue synergy expectations for STP (some but not all of which are likely to be included in new contract wins).
Base-case valuation now A$0.40/share fully diluted
Our base-case DCF valuation for SGI has increased to $0.40/share (up from $0.32/share) as a result of sales leverage to a cost base built for growth. Our numbers now incorporate 11- 12% sales growth in FY23 and FY24, stable to improving gross margins driven by both scale, private label and business mix, and a relatively stable cost base. Our DCF only implies 12x forecast FY23 EPS and 7.5x EV/EBITDA.
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