Supply Network Ltd – Estimating The Fair Value
Supply Network Ltd is a relatively unfamiliar name to many. This company has quietly achieved remarkable growth in its stock price over the past decade. In fact, the value of its shares has surged by over 600% during that time. In the last 3 years alone, a notable increase of 300%.
Even without including the dividends along the way that is a remarkable return for shareholders.
Despite its modest size of a when compared to the giants of the ASX, Supply Network Ltd, with a market capitalization of $580 million operates as a hidden gem.
Functioning as a trading entity within the Multispares brand, they have established a niche in providing replacement parts. Specifically tailored for road transport equipment, such as trucks and buses.
Supply Network may not necessarily be categorized as an exhilarating enterprise. It is often these unassuming businesses that merit closer attention.
Considering the upward trajectory of the company’s share price, it is important to understand the underlying dynamics of Supply Network. What insights does Supply Network the business offer us into its underlying value.
Supply Network Ltd Business Performance
A great management team is evident within Supply Network. This is evident in their ability to consistently achieved upward growth in both revenue and profits.
The business economics of Supply Network portray an upward trajectory resembling a steady staircase, with all metrics exhibiting continuous improvement.
In their most recent full-year guidance update for June 2023, Supply Network has provided an optimistic outlook. They anticipate revenues of $250 million, a substantial increase of 26% compared to the previous year.
Additionally, unaudited profits after tax are projected to reach $26.5 million, reflecting a remarkable 30% surge in net profit. These figures highlight the consistent growth achieved by the company.
Over the past decade, Supply Network has demonstrated impressive compound annual growth rates, with revenue expanding at a rate of 14% and net profit growing by 19%. Such sustained growth is a testament to the company’s effective management.
Notably, gross margins have exhibited a year-on-year improvement, further affirming the competence of the management team. This enhancement in gross margins indicates the ability of Supply Network to optimize its operations and maximize profitability.
Moreover, a deeper analysis of Supply Network reveals their steadfast commitment to long-term investments. Recognizing the importance of maintaining a competitive edge, the company has made substantial investments in strategic logistic positioning across key regions in Australia and New Zealand.
This strategic focus underscores Supply Network’s dedication to securing its market position and ensuring future success.
Estimating the Fair Value of Supply Network Ltd
Supply Network is a fairly simple business to understand and has proven track record of consistent profitability. With that in mind let us use two methods to estimate Supply Network’s fair value. The two methods we are going to use today is the PE Valuation Method and a Discounted Cash Flow Model.
PE Valuation Method
The main assumptions that will be required with this method are:
- the rate of growth in revenues;
- expected net profit margin ; and
- a suitable PE multiple the market will be willing to pay for this business
For this valuation method I have used a growth rate of 26% for 2023 and the growth to slowly taper. Net margin for year 5 is 10% similar to this year to avoid over-optimism.
The average PE has been 17 but over the past two years PE has been above 20. I speculate that if Supply Network is able to continue their growth, the market may be willing to pay a higher multiple.
With all these inputs the PE valuation has given a fair value of $15.04 at year 2027.
PE Valuation template available here
Discounted Cash Flow Valuation
Discounted Cash Flows are imperfect tools and much of the valuation depends on your assumptions.
In this method we have used similar growth assumptions in the PE Valutaion Method. However, unlevered discounted cash flow analysis has much more assumptions required.
The disadvantage to this method is that because you are forecasting, the figures you use is most likely to be wrong. However, the DCF has calculated a fair value of $14.99, almost identical to the PE Valuation Method.
Discounted Cash Flow template available here
In writing the value of SNL is trading at a price of $14. The valuation analysis of $15.00 indicates that SNL is currently undervalued by 7%.
Key Takeaways
- Both valuation methods have indicated a fair value price of $15.00. This indicated that the stock is undervalued at $14 at the point in writing.
- Supply Network has hallmark indicators of competent management and a healthy business with strong fundamentals
- If the business is able to continue it growth trajectory and maintain competitive advantage, it will be a great business to hold
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Disclaimer – Incognito Wealth does not own shares in the companies mentioned above. The sole purpose of this blog is provided for research and entertainment purposes. Incognito Wealth does not provide financial advice and in no way provides financial services. Please consult with a professional financial consultant or accountant when making your own investment decisions.