Stealth Global Holdings Ltd: Skipper Adds Another Lever for Operating Leverage
Stealth Global Holdings Ltd
Skipper adds another lever for operating leverage
Stealth Global Holdings Limited (ASX:SGI) has announced the acquisition of Skipper Transport Parts (STP) for A$4.2m, 100% debt funded. Based on initial expectations for revenue of $18m and EBITDA of $1.1m in the first 12-months of ownership, the acquisition is EPS accretive by between 16% and 20% over FY22 to FY24. STP is a national provider of a complete range of maintenance, repairs and operations (MOR) parts for all makes across all brands of truck, trailer, automotive and agricultural parts. Based in WA the group has (5) branches and also operates (12) onsite stores. The acquisition has significant synergies and overlap with the existing SGI business when you consider customers (mostly mining related), location (WA), inventory management (significant in-stock SKUs) and service (numerous touch points). STP adds to the acquisition by SGI in recent years including C&L Tool Centre in December 2020 utilising the group’s balance sheet to build a business of significant scale.
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.
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- Stealth Global Holdings Ltd: Skipper Adds Another Lever for Operating Leverage10 Jun 2021