Supply Network (SNL)

My intrinsic valuation of SNL is $1.95 per share (using a free cash flow model).

Supply Network Limited (SNL) is an Australia-based company engaged in the provision of aftermarket truck and bus parts to the commercial vehicle industry.

The Company operates entities in Australia and New Zealand under the Multispares brand. Each entity offers a range of replacement parts for road transport equipment.

SNL sells a range of services, including parts interpreting, procurement, supply management and problem solving.

Company website: http://www.supplynetwork.com.au/

You can download a copy of my valuation HERE.

SNL is a simple business with a clean balance sheet. The company directors currently own a significant portion of SNL’s stock.

A large part of SNL’s revenue is non discretionary – trucks and buses need to be kept on the road. Clients are also willing to pay a premium to avoid delays in obtaining parts and for reliability.

The business has enjoyed consistent revenue growth over several years as it has expanded its network of stores across Australian and NZ.

In recent years, SNL has earned an increasing return on invested capital (ROIC). Profitability, coupled with increasing operating margins, indicate that SNL enjoys a sustainable competitive advantage over its smaller peers.

Expansion is continuing as SNL moves into a new main warehouse in Sydney, with double the capacity of the previous location. History suggests that EBIT is flat for 2-3 years during expansion, followed by an increase in profitability thereafter.

The stock pays a trailing dividend yield of 4.62% fully franked.

SNL is currently trading at fair value. My base case assumptions are:

  • Sales growth = 10% which is in line with history and lower than current revenue growth. I have assumed that sales growth fades to the long-term bond rate in year 10.
  • Long-term EBIT margin = 10% which is in line with history. This is a conservative assumption since current operating margins are over 12% and margins may continue to improve as SNL generates economies of scale.
  • Re-investment in working capital = I have made the conservative assumption that assumed that future growth will require 33% more investment in inventory than SNL’s current investment in inventory as a percentage of sales.
  • Cost of capital (COC) in year 10 = 9%. This is a conservative estimate as the long-term cost of capital should hopefully be lower if SNL continues to grow and develops into a larger and more mature company.
  • In the long-term SNL’s return on invested capital (ROIC) = COC. This is a conservative assumption since SNL’s historical growth in profitability suggests that it has competitive advantages.

This results in an intrinsic value estimate of $1.95.

Best case:

  • Sales growth = 10% (in line with history).
  • EBIT margin = 12% (in line with current).
  • Re-investment in working capital = in with current.

Intrinsic value = $2.62, SNL is 25.50% under-valued.

Worst case:

  • Long-term EBIT margin falls to 7% (it hit 5% in 2005 and 2006 but bounced back quickly).
  • Sales growth = 5%.

Intrinsic value = $1.17, SNL is 66.33% over-valued.

You can download a copy of my valuation HERE.

Market Risks

  • Illiquidity – small size and free float.
  • Dilution – SNL issues a large number of shares as part of its DRP. Investors who don’t participate will experience a significant level of dilution.
  • Foreign Exchange – SNL’s largest asset is its inventory which is imported from Japan and Europe denominated in JPY and EUR.

Business Risks:

  • Competition from small independent operators.
  • Product price deflation.
  • Higher fuel prices. Fuel is the largest cost for a truck/bus operator, a rise in fuel costs can trigger a delay non-essential maintenance.
  • Longer warranty periods for new vehicles reduce the need for spare parts.
  • Improved service life of parts.
  • A drought in regional Australia could trigger a delay non-essential maintenance by farmers.
  • A slowdown in mining could reduce demand for truck parts.
  • Technological improvement. For example, modern engines have fewer moving parts and consequently the number of spare parts for servicing has reduced over time.

You can download a copy of my valuation HERE.

 

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