Stealth Global Holdings (SGI.AX)
Deep Dive
Disclosure: SGI is very very illiquid with ~$12m market cap, I own shares in the company as of writing this
Stealth Global Holdings is an industrial distribution company, and before you leave SGI is one that has a lot of growth potential and is very cheap, trading at just 5x H1 23 EBITDA
With its IPO in 2018 at 18 cents Stealth has been able to 4x its revenue from $24m to $100m in FY22 with revenue expected to be between $107m and $112M in FY23.
Stealth interests me for a few reasons:
Operates in a highly fragmented industry and has the most diverse product range of any industrial distributor
Stealth plans to grow organically and through acquisitions, which offers many synergies given the cross-selling abilities, ability to cost cut, and very attractive valuations they can acquire these companies
Margin expansion: With a low share price and low-interest rates Stealth prudently used debt for acquisitions, as a result, they have been paying off the debt which has been masking the underlying profits of the business, and all debt will be rolling off in the coming 12 months and along with general operational efficiencies very good chance of substantial margin increases
Valuation: In investing the only thing that really matters is the price you pay, FY23 revenue expected to be around $110m and growing going forward. CEO Mike Arnold has mentioned an 8% EBITDA margin going forward if they don’t grow revenue and achieve just a 2% margin, they would be trading at just 6x those earnings
Operations
As you can see from the figure below (2022 annual report) Stealth has 3 operating segments:
Member: Supplying independent operators/retailers (B2B)
Consumer: for individual trade and retail customers (B2C)
Business enterprise: Business customers, distribution (B2B)
Industrial distribution is highly fragmented with the largest business Blackwood having just a 4% market share. While Generally scale is the largest source of competitive advantage, Stealth has found a nice niche being the only company that operates in all their different product categories.
Acquisitions
you can see the history of stealth acquisitions and divestments. Stealth’s current business consists of 5 brands, which has changed over the years with a couple small divestments
Heatleys
C & L tools
Skipper Transport
United tools
ISG industrial supply group
Synergies
Industrial distribution is a tough business being capital intensive, with large working capital requirements, and very low margins, which all contribute to an inability to grow fast organically. While this isn’t ideal for stealth it also isn’t ideal for competitors, and generally, the biggest moat in low-margin business is scale. In a number of interviews, Mike has mentioned the vast synergies and effectiveness of acquiring different businesses as they open up opportunities to
Increase revenue- Through cross-selling across the different brands
Cost cutting- Shutting down of unprofitable locations, cutting overhead costs, Integration of the business’s front and back systems, cutting staff costs and other operational efficiencies
Bargaining power- Scale gives Stealth more bargaining power with suppliers, and has made them more sticky to their customers as they can offer more of their required products, which have both resulted in offsetting the impacts of inflation
Mike has spitballed the underlying profitability of a few businesses in investor presentations and they are reasonably impressive, being publicly listed and having a number of decently paid executives, which is necessary if you want to acquire and retain talent is definitely masking the underlying profitability of the business.
Financials
Note: 2023 guidance: Rev between $107m-$112m and profit above 2022 ($1m is my estimate), and numbers don’t include profit from discontinued operations
H1 22 Profit was -$400k and grew to $300k H123, I expect profit to be about $1m for the financial year which I say that with no real confidence in either direction.
Through the First 3 quarters of FY23 revenue growth was 17.4%
Debt
With a very low share price and cheap debt opportunities, Stealth prudently acquired their companies through debt. In Mike's most recent interview I have linked at the bottom of the page, he says they have around $10m of debt on the balance sheet, $7.5 which is for working capital requirements and the remaining $2.5 is long-term debt- which will be paid off by the end of FY24. With $5m of cash on the balance sheet, there should be no issues paying off the debt.
Outlook
Stealth has a number of ways to grow the business through:
Organic Growth- opening of new locations, gaining new customers, providing more products to existing customers, growing e-commerce solutions, growing partnered stores
Acquisitive growth- adding stores/ locations, gaining new products, ability to cross-sell
Margin expansion- rolling off of all long-term debt in the coming 12 months, cost cutting, operating leverage, opportunity to reach 2-4% NPAT margin
You can see from the first figure managements target of 150+ stores, $200m Rev and 8%+ EBITDA, I think its quite ambitious and hope it doesn’t lead to reckless acquisitions, but if they fall anywhere near that in the coming years there is a very high probability of very nice shareholder returns
Valuation
P/B- 0.8
5x H1 23 EBITDA
~12x 23 earnings estimates
This is my base case scenario which mind you is very very conservative, given there isn’t a real track record in the business I want to make sure there is a large margin of safety, and am assuming they miss their growth target by quite a bit, but I definitely wouldn’t be surprised if by the base case is exceeded. This base case is most likely going to change over time given any acquisitions and movements in growth prospects.
They recently announced they would pay 20-30% of free cash flow as a dividend which you can see accounted for in the model.
Assumptions 2026:
Rev: $140m -8% CAGR
NPAT- $2.8m, 2% margin, EPS:$0.03
10% dilution
20% payout ratio along the way- $0.142/ share Dividends
11x earnings
2026 share-price + dividends:
$0.278 + $0.014
=$0.29 Share price
Forecasted IRR: 34%
you can see above my expected value numbers, and even given a 10% chance of this thing being worth $0 in 3 years its still an expected value of 0.36/ share in 2026 - 44% IRR
Crunch the numbers yourself, these will almost be certainly wrong, but seems cheap to me
What to watch
Debt reduction- debt is expected to roll off in the coming 12 months which will help boost margins
Margin expansion- probably the most important thing going forward, how will the on going integration of the businesses cut costs
Acquisitions- Once they fully integrate the acquired businesses in the next year or so, and debt rolls off, will management be eager to acquire more, and if so how many, at what price and now through debt or equity
Organic Growth- Will there be actual value creation by the business or just growth by acquisition
Management- the only real knock against Mike is his focus on the share price. In a few interviews when he is asked about it, he does go on about it a bit, which is understandable given acquisition ambitions and the inability to raise capital without severe dilution, but something to note as a potential distraction for management
The moment you hear of a $12m market cap industrial distribution company with high levels of debt, it probably turns you off, but in there lyes the opportunity. I know of a fair few people who have been in this for a while, and the business has continued to execute and the share price has done nothing. As normally with companies like this the market doesn’t tend to front run them, and waits the the company actually executes. Do your own due diligence.
Link to recent SGI investor presentation: