Supply Network Limited

 

SNL Details
 
Lower Profitability Margins on Account of Business Expansion:  Supply Network Limited (ASX: SNL) is engaged in the provision of aftermarket parts to the commercial vehicle industry. Recently, SNL communicated that it will conduct its 2019 Annual General Meeting on 26 November 2019.
 
FY19 Operating Highlights for the Period Ended 30 June 2019: SNL announced its FY19 financial results, wherein the company reported revenue of $123.898 million, up 10.5% on y-o-y basis. Net profit during the year came in at $8.69 million as compared to $8.17 million in FY18.  The company reported 10.2% higher sales revenue from Australian operations. New Zealand’s operation delivered sales growth of 9.0% in NZ$ terms. During the period, the company commenced operations at the new branch and distribution centre in Hamilton, New Zealand. During the year, SNL completed the construction of the new branch in Christchurch New Zealand with occupancy in June 2019. During the quarter, the Group continued to invest in stock in order to improve service levels and support growth objectives. As per the Management commentary, the above investments are likely to increase the operating costs of the company, however, the same would aid to the long-term growth in coming years. During the year, the fleets business witnessed the same rate of growth as the rest of the business while large fleets were driven by sophisticated buyers with a focus on operating costs and risk management. The business saw significant competition with aftermarket suppliers for fleet business and fleets are also the main target of vehicle franchises with a very different value proposition. The company reported cash and cash equivalent of $1.61 million, followed by inventory of $42.832 million and current assets at $58.39 million as on 30 June 2019. SNL reported total assets and net assets at $69.711 million and $38.259 million, respectively as on 30 June 2019.

SNL has distributed a fully franked dividend of AUD 0.08500 for each ordinary share held. The stock has delivered an annual dividend yield of 3.45% at the current market price of $4.200.

Outlook:  As per the Management guidance, SNL expects revenue growth of 10% for FY19- FY20. The management will be focusing on organic growth opportunities in the existing business units. The business is likely to continue the expansion of the product range and service network for the next three financial years.

Stock Recommendation: The stock of SNL is trading at $4.2 with a market capitalization of ~$171.2 million. 52-weeks trading range of the stock stood at $3.410 to $4.960. The stock has delivered a return of 5% and 9.66% during the last three-months and six-months, respectively. The stock is available at a price to earnings (P/E) multiples of 19.7x on it trailing twelve months (TTM) basis as compared to the industry median of 12.8x. Enterprise value (EV) to EBITDA of the stock stood at 12.3x on TTM basis as compared to 7.8x as compared to the industry median of 7.8x. During FY19, the business has delivered lower gross margin, EBITDA margin, and net margin at 41.5%, 11.4% and 7% as compared to 41.7%, 11.7% and 7.3% in FY18, respectively. The management of SNL guided that the business will continue for expansion activities in coming years and as a result of, there will be a rise in the operating costs of the business, and we expect erosion in margin in the coming years. Considering the aforesaid, recent price movement, valuation, margin and business prospect, we recommend a ‘Sell’ rating to the stock at current market price of $4.2, with no change as on 07 November 2019 and suggest book profit at the current juncture.

 
SNL Daily Technical Chart (Source: Thomson Reuters)

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