Unsung vehicle parts supplier Supply Network Limited (SNL) has rewarded shareholders handsomely in recent years, rising from 30 cents five years ago to a record high of $2 earlier this month.
Even with that rise, the company is still poised somewhere between a micro-cap and a small-cap – SNL is valued on the Australian Securities Exchange (ASX) at $67 million.
Growth from here might be at a slower pace, but SNL still has plenty going for it.
Listed in 1987, SNL provides after-market parts to the commercial vehicle industry in Australia and New Zealand, mainly truck and bus parts. The company operates through two subsidiaries, Multispares and Globac.
Multispares distributes truck, bus and trailer parts from leading Japanese and European manufacturers, but also provides customers with a range of services including procurement and supply management. It runs a fully integrated distribution network that allows it efficiently to import, distribute and hold stock close to customers, which keeps prices low. The customer base is mostly major and minor fleet operators, independent workshops and owner-drivers.
The business is based on a network of six wholly owned warehouse / sales outlets located in Brisbane, Newcastle, Sydney, Melbourne, Adelaide and Perth plus a scattering of regional representatives and authorised resellers. Multispares New Zealand opened in Wellington in 1991 and since then has expanded with new branches in Auckland and Christchurch.
Local stocks are supplemented by daily airfreights out of Auckland and Sydney with the aim being to provide same-day or next day-service for most products to most customers.
The company operates a national phone hotline as well as its MultiPIT internet application, which gives customers online access to the in-house catalogue, advice on ‘interpreting’ customer requirements and purchasing. The customer base consists of major and minor fleet operators, independent workshops and owner-drivers.
Globac is a specialist supplier of brake and clutch friction and control products, serving a network of retailers around Australia and in New Zealand, providing them with comprehensive product service, support and promotional material. Using this buying power Globac deals with the major global manufacturers: Globac holds the distribution rights in Australia and New Zealand for the Baltec, hvb, lkw bremse and Aoki brands.
The business model in New Zealand is very similar to that in Australia but the two companies are independent and New Zealand has its own management team.
SNL is a classic case of steady growth in all of the underlying measures driving appreciation in the share price.
• Four years ago, sales revenue was $40.3 million: in FY13, it was $67.8 million.
• Four years ago, net profit was $1.5 million: in FY13, it was $4.5 million.
• Return on assets has risen from 7.2% in FY09 to 13.7%, while return on equity has increased from 14.4% to 26.2%.
• Net tangible assets (NTA) per share have climbed from 43.9 cents to 54.1 cents, while gearing has gone in the other direction, falling from 31.3% to 17.9%.
In FY13, sales revenue rose by 11.6% to $67.8 million, with sales in the Australian operation growing by 12.2% and in the New Zealand operation, increasing by 5.8% (in NZ$ terms.) Earnings before interest and tax (EBIT) was up 11.9% to $6.7 million, while net profit lifted 14.9% to $4.5 million.
Earnings per share (EPS) rose by 15% to 13.3 cents, while the total dividends for the year were raised by one cent, to 8 cents a share.
SNL is a great example of a company that knows its market well. The Australia-New Zealand market for trucks and buses is among the most diverse and most competitive in the world. Vast distances, sophisticated operators and a wide variety of transport tasks drive significant diversity in vehicle makes and models, presenting many challenges for replacement part suppliers. SNL’s business has evolved around these unique characteristics of its local markets: because the cost of product failure in its markets is high, it has built its reputation around quality.
It is costly to hold a product range as broad as that which SNL holds, but the company considers this necessary to operate in all regions of Australia and New Zealand and give its regional businesses – which in some cases deal with markedly different parts markets – a high degree of autonomy. SNL defrays the higher costs of its structure with substantial scale, which gives it strong buying power.
An example of the different approach needed is Multispares New Zealand offering global airfreight to supply components for the myriad of “import” speciality vehicles that have little or no dealer support in New Zealand – for example, some of the ski-field equipment used in the country.
Despite tough conditions in FY13, SNL says contract supply to major bus fleet operators grew steadily and it achieved new growth in segments of the truck market it is targeting. Success in these segments provides the foundation for growth expectations for the current year.
At the 2013 annual general meeting, SNL told shareholders that it expected “similar growth” in sales and earnings for the year to June 2014. That would put net profit for FY14 at somewhere around $5.17 million – up by 14.9% – which equates to about 15.12 cents a share.
If the company were to grow its dividend by the same amount in FY13 as in FY12, it should pay somewhere around 9.1 cents a share in FY14. On that reckoning, at the share price of $1.96, SNL is trading at a prospective price/earnings (P/E) ratio of 13 times earnings and a fully franked dividend yield of 4.66%. Those are not expensive metrics for one of the true quiet achievers of the ASX.
