Stealth Global Holdings Ltd: Skipper Adds Another Lever for 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), own labels and complementary acquisitions (such as C&L Tools and STP). Resulting volume growth offers a virtuous circle of scale, operational efficiency, margin growth and profit growth.

Skipper Transport Parts a good strategic fit & EPS accretive
From location (WA) to customer overlap (mining based with cross-sell estimated at 75%) and an underlying service focus of both businesses (including being in-stock across hundreds of thousands of SKUs), the fit between SGI and STP looks a good one. Being a small business sold out of a large business (Automotive giant AP Eagers with a market valuation of A$4.1bn) there are likely opportunities to invest and further energise the STP brand. To this point management have identified $10m in revenue synergies with the current customer overlap estimated at 3% against the 75% cross-sell estimate. From an EPS perspective we estimate accretion of 16%-20% in the forecast period FY22-FY24.

Base case valuation A$0.32/share fully diluted
Our base case DCF valuation for SGI has increased to $0.32/share (from $0.27/share) after incorporating the STP acquisition into our numbers. We have factored in some revenue & earnings synergies but not to the levels identified, offering earnings and EPS upside. Since our last update note key SGI peers have rallied between 9% (SNL:ASX) and 30% (PGC:ASX and CYG:ASX) to be trading at multiples well in excess of SGI, particularly if FY22 is considered.