ASX Microcaps with a blue-chip profiles: Stealth Group

The world's biggest central banks are set to reverse a record string of rate hikes and stocks towards the small end of town are widely expected to benefit. In this series, we're going to take a deep dive into profitable microcaps with unique businesses and strong balance sheets (which hopefully means no unexpected or nasty capital raises).

First off the ranks is Stealth Group (ASX: SGI) – One of Australia's largest industrial distribution groups, operating 70 company and independent partner stores and providing more than 1 million products to commercial, trade and DIY customers

Stealth Group At a Glance

• What do they do: Stealth Group is headquartered in Perth and operates under five subsidiary brands – Heatleys, Tool Centre, Skipper Transport Parts, Industrial Supply Group and United Tools.

• Management: Chief Executive and founder Michael Arnold founded the company in 2014. He has over 36 years of experience in distribution and supply chain management and previously served as the COO of ADG Global Supply. He beneficially owns 10.9 million shares in the company

• Market cap: $27 million

• Cash on hand: $8.8 million as of 31 December 2023

• Shares on issue: 100.9 million

• Share price performance: Up 18% year-to-date and up 120% in the past twelve months

The Latest Results

Stealth Group reported a record set of numbers in half-year FY24. Some of the key highlights include:

• Revenue up 7.8% to $56.5 million

• EBITDA up 23.8% to $2.8 million

• Net profit after tax up 49.1% to $0.5 million

• Net debt reduced by 42.1% to $5.8 million (1H23: $10.1 million)

"The company has changed a lot in its five years on the ASX, completing seven acquisitions, merging those in, rightsizing, building capability and evolving to meet the changing needs of customers, with the lion’s share of profits being drawn from commercial and trade sectors led by Heatleys Safety & Industrial and C&L Tools," said Chief Executive Mike Arnold.

Five Interesting Takeaways

1. A dividend is coming: Stealth Group generated $2.4 million in free cash flow for the first-half of FY24 (1H23: $1.2 million) which supported the ongoing repayment of debt. The company said this sets the "stage for maiden dividend announcement for FY24."

2. Sizeable cash position: The company has $8.8 million cash and a market cap of $27 million, which gives us an enterprise value of $18.2 million.

3. Resilient categories: "Over 95% of Stealth's products are non-discretionary. As an 'all-weather' distributor, Stealth is well-positioned to withstand economic downturns," the company noted in its full-year FY23 results, adding that "despite fluctuations in economic conditions, the demand from mining, resources, transportation, infrastructure, construction, repairs-maintenance, and the home improvement market provide long-term resilience for the Company."

4. Full-year outlook: The half-year FY24 result pointed to some relatively vague full-year targets, including total organic sales growth of more than 10%, net profit before tax to exceed FY23 and EPS growth of more than 25%. Stealth Group is targeting $300 million revenue by FY28.

5. Breaking out: Stealth shares are trying to break out to five-and-a-half-year highs.

Stealth Group price chart (Source: TradingView)

Typical Microcap Challenges

Stealth Group has a consistent track record of posting solid revenue and earnings growth, but its share price went nowhere between March 2019 and September 2023. Its recent breakout coincides with a few key events:

• Global equity markets bottomed around late October and rallied to record levels by Feb-Mar 2024

• Global bond yields peaked around late October and markets started to aggressively price in rate cuts for 2024

• Stealth Group participated in ShareCafe's Small Cap "Hidden Gems" webinar on Friday, 16 February 2024 – The stock rallied 20% on the day of this presentation. This may have attracted more investors/volume.

Like most microcaps, Stealth Group is also relatively illiquid. So it's pretty hard to size up, manage risk and offload shares without moving the share price.

Disclaimer – The author does not own any shares in Stealth Group. Market Index is not affiliated with any of these companies. The information provided in this article is for educational purposes only. It is not intended to be a substitute for professional advice or recommendations. Always conduct your own research and consult with a qualified processional before making any decisions.