Stealth Global benefits from resilient revenue stream

When economic growth is slowing and revenue growth is difficult to harness, businesses look to trim costs in order to maintain or grow the bottom line.

This can include staff cuts, office equipment being repaired rather than replaced, and technology upgrades put on hold.

In this environment, companies that provide discretionary services, particularly to the small to medium enterprise (SME) market, often struggle.

A useful stock selection strategy to adopt during such a cycle is to focus on businesses that provide essential or non-discretionary services, expenses that management can’t dispense with.

One company that fits this profile is Stealth Global (ASX:SGI), an international supplier and distributor of a wide range of safety, industrial, workplace and healthcare consumable products.

Many of the goods distributed by Stealth have been mandated by industry health and safety bodies as a workplace necessity.

As indicated below, the range of more than 500,000 workplace products distributed by Stealth provides the company with diversification across numerous industries from remote heavy construction worksites to the CBD office kitchen.

Making a swift impression

While Stealth was founded in 2014, the company only listed on the ASX in October 2018.

However, it has been quick to demonstrate its growth potential, delivering first half revenue growth of 13%, in line with management’s forecast.

Pro-forma sales in Australia were up 18%, and there was a doubling in sales in the UK business, which services customers in Africa.

Managing director Mike Arnold also expects a strong performance throughout the remainder of 2019, saying, “All business units have incremental sales projects for delivery in the second half of 2019 and a strong pipeline of prospects, with a focus on winning new large and medium customer types.

“A stronger performance is expected for the second half of FY19 supported by new customer gains.

“Longer term, sentiment across key markets and sectors Stealth operates in remains encouraging and management has increased confidence for growth in 2020 and 2021.”

Growth through acquisition

As flagged in the group’s IPO, Stealth completed its acquisition of Heatleys Safety and Industrial, and it has commenced integrating the businesses to extract the synergies and capitalise on the growth opportunities that the acquisition presents.

The combination of Stealth and Heatleys is highly complementary, delivering a competitive strength that positions Stealth as the only Australian group of its type operating across the five major geographical markets in the country.

It builds upon Stealth’s position as a successful international supply and distribution group providing a wide-range of safety, industrial, healthcare and workplace products to the mining, construction and energy sectors.

Heatleys reported revenue of $43.2 million in FY18, which combined with Stealth, increased group pro-forma reported FY18 revenue to $66.1 million.

Potential for PE based rerating

Heatleys will make its first full six-month contribution in the second half of fiscal 2019, providing earnings momentum which analysts at Argonaut expect will result in a net profit of $2.2 million, representing earnings per share of 2.3 cents.

Stealth’s shares closed at 14 cents on Tuesday, implying a fiscal 2019 PE multiple of six relative to Argonaut’s forecasts.

The broker values Stealth at 25 cents per share, implying upside of approximately 70% relative to yesterday’s closing price.

Potential catalysts are further acquisitions which management has said it may consider, as well as success in securing new contracts.

There could also be a PE based rerating given that the group is expected to generate a profit of $3 million in 2020, representing earnings growth of 40%, suggesting the current PE multiple is heavily discounted.

Acquisitions and/or the securing of new contracts would likely see the focus turn to Stealth’s 2020 financial metrics, increasing the probability of a PE based rerating.