Stealth Global Holdings Ltd: United Tools Acquisition Adds Further Revenue Synergies
Stealth Global Holdings Ltd
United Tools acquisition adds further revenue synergies
Stealth Global Limited (ASX:SGI) has announced the acquisition of United Tools Limited (UTL) for $24k, which includes $1.25m in cash slated for marketing subsidies to retailers over the next two years. UTL is a co-operative buying group supplying ~33 retailers with tools and industrial-related trade products. The business generated FY21 revenues of $8m, predominantly as income for the management of preferred supplier arrangements, marketing, advertising and shared services for 33 retail stores. FY21 EBITDA was $0.3m, implying a very attractive acquisition multiple! SGI estimates UTL-supplied retailers purchase ~$100m at the wholesale level, offering significant buying and cross-selling opportunities. SGI management estimates $24m in revenue synergies are available at a target EBITDA margin of 10% ($2.4m) over the next three years, which would add 35% to our existing FY23 EBITDA estimates, all else being equal. We recently upgraded medium-term sales by ~5% on the back of new customer contracts and this may still prove conservative given the expected revenue synergies from the recently-acquired Skipper Transport Parts over the same period. 1HFY22 sales have been confirmed at $46.5m, in-line with RaaS estimates and +53% on 1HFY21. We are yet to incorporate numbers and await a detailed business update on February 8 for more clarity, but our numbers into FY24 look well-underpinned given these revenue synergy opportunities.
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 revenues are driven from repeat customers.
Continuing to enhance its distribution model
Organic growth at Heatleys, together with the recent acquisitions of STP and C&L Tools, have increased the scale and product offering of the Stealth Group to over 1 million SKU’s. This scale has been further enhanced by the acquisition of cooperative buying groups ISG and (soon to be) UTL. Combined it offers consolidated buying power to better compete with the majors and the opportunity for revenue synergies and further range extensions across 66 physical store locations in Australia. The acquisition of UTL offers store expansion for SGI without the need to invest capital to build its own company run store network, and a new income stream in the form of “wholesale distribution and service fees”. UTL also offers increased exposure to “retail” as most of the SGI brands are “business” focused.
Base-case valuation remains A$0.40/share fully diluted
Our base-case DCF valuation for SGI remains $0.40/share as we are yet to integrate UTL into our numbers. Our numbers 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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