Is Supply Network A Forever Stock?

This story features SUPPLY NETWORK LIMITED. For more info SHARE ANALYSIS: SNL

Supply Network might be a small cap, but it’s latest earnings results exemplify a company which ticks so many of the right boxes for investors.

-Financial metrics hum
-Rinse and repeat earnings
-Growth outlook trucks along
-Quality & growth, at what price?

By Danielle Ecuyer

The numbers don’t lie

At first glance it’s hard not to feel a warm glow of “quality” radiating from Supply Network ((SNL)).

I am not just talking about the share price which has the bottom left to top right trend in place, and that has held steadfast over the last 12-months, five and twenty years; it is the basic financial metrics of the company that glisten like diamonds in the sky.

Ok, too much hyperbole. 

A quick peruse over the historic financials on the FNArena website (thank you, FactSet) reveals a growing trend from 2019 to 2024 for return on capital, invested capital and return on assets to 36.5%, 24.6% and 17.9%, respectively. 

Return on equity has risen to 36.5% from 23.8% over the same period.

EPS is up almost four-fold since 2019 as is the dividend per share. What’s not to like?

Supply Networks by its own admission is a simple business which focuses on quality. 

It sells truck and bus parts across Australia and New Zealand, but in practice, as the annual report is quick to highlight, Supply Network sells a “range of services including parts interpreting, procurement, supply management and problem solving”.

The company stresses it operates at the “quality” end of the aftermarket, with reputational risk on a longstanding customer base too high to compromise on the quality of products and services.

Management has decentralised to accommodate regional market demand with in-depth knowledge at the branch level to deal with problems.

The business has scale, which allows for cost management and operational efficiencies.

Is it surprising that broker Taylor Collison puts Supply Network in the basket of “exceptional businesses run by A-grade management teams are hard to come by”?

FY24 results set up FY25 for more growth

Recent FY24 results didn’t disappoint either. Moelis states the earnings are “Still Truckin’ Along”. 

Some might yawn at the predictability of the earnings, revenue up 20%, EBITDA, net profit up 21% and a gross margin of 42.5%, which is unexceptional according to Taylor Collison. 

Management guided to FY25 revenue growth around or a little above the company’s long-term average of 14% p.a.

Moelis highlights much of assumed FY25 growth is volume generated with minimal inflation as well as a new branch opening in Perth (Wangara) on March 1, 2025. Goldman Sachs views this as a fast-growing industrial precinct of outer-north Perth.

Strategically, Taylor Collison emphasises management remains prudent on the cadence of new branch openings to one every 12-18 months.

Supply Networks invests for growth, with Moelis observing management looks quickly to scale revenues as an offset to the increased costs involved with new openings.

In FY24 branch capacity at Darra (Brisbane) and Adelaide was doubled; more moderate capacity upgrades were initiated in Auckland, Christchurch and Dunedin with small upgrades at three Sydney branches. A doubling of capacity at Truganina (Vic) is on the cards by FY25 end. Combined, these investments are expected to yield an additional $400m p.a. to group revenues.

Management is also assessing two other branches for FY26.

Growth is not only generated organically and via branch openings.

Taylor Collison describes how the company has refined over a 20-40 year period several operational enhancements including improved product procurement across US, Japanese and European product categories; investment in transaction automation; -$100m invested in streamlined inventory procurement and excellent customer service. 

While the macro environment is currently not impinging on operations, the Taylor Collison analyst stresses that over two decades this has not always been the case. However, the business model and investments are expected to reap further market share gains with overall annual market growth of 5-10% over the next decade.

Goldman Sachs concurs; the analyst envisages the same market runway from growth in truck freight which historically has exceeded GDP, increasing parts per truck, with hi-tech parts becoming more prevalent. Market share gains are underpinned by expanded site capacity and catalog offerings; the investment in TEMOT also improves access and relationships with global suppliers.

Ord Minnett discusses the longer-term growth outlook. The broker notes aging vehicle fleets, increasing complexity of vehicles (increased part content per vehicle) and rising freight tasks will underpin “strong demand” from commercial vehicle customers.

Valuation can’t keep the stock price down

With all this good news, the 99% appreciation in the share price over the last 12-months is justified. Or is it?

Taylor Collison alludes to a re-rating of the company’s valuation as accounting for most of the performance, with a modest 7.5% lift in the FY25 EPS forecast over the same period.

The stock is very tightly held. The top five shareholders own 57.8% of free float with the top 20 accounting for 81.9%. In a relatively small cap company, $1.233bn market cap, a lack of liquidity can accentuate price moves to the upside (and downside).

The prospective dividend yield sits at just over 2% (100% franked) with FY25 prospective price-to-earnings multiple around 30-33x depending on which broker’s EPS forecast.

On all metrics the stock does not look ‘cheap’, but Mr Market has been more than happy to pay up for quality, earnings durability and the prospect of ongoing earnings growth.

Daily monitored broker Ord Minnett has a $30.50 target price, up from $26.60 previously and a Buy rating.

Moelis and Goldmans Sachs are also Buy rated with target prices at $30.50.

Taylor Collison can only muster a Hold, with the valuation just a bit too racy. This broker does not offer a target price.

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