Supply Network (SNL) | Positive trading update; guidance largely reinstated
COVID-19 update: Supply Network Ltd (SNL) last provided a trading update on 25 March 2020. At that time, its trading performance had been tracking slightly ahead of the guidance issued with its half-year result. Management expected FY20 sales of approximately $136m and underlying NPAT of $8.8m ($9.5m on a pre-AASB 16 basis). However, in late March, trading conditions had started to slow, consistent with the slowdown in the broader Australian economy. At the same time, NZ moved to a stage 4 economic lockdown. Given the uncertainty regarding trading conditions, the company withdrew its prior guidance. Further, the Board decided to defer payment of the interim dividend (6.5 cents per share) until 2nd October 2020.
Trading conditions improve: More recently, SNL’s Australian operations have rebounded and performed better than expected, with trading in 2H20 above the pcp. SNL’s New Zealand operations, which were significantly affected by the level 4 lockdown, are also progressively returning to normal trading volumes. As such, the company has reinstated guidance for FY20, forecasting sales revenue of c.$135m and underlying NPAT of c.$8.5m ($9.2m on a pre-AASB 16 basis). Furthermore, given its increased confidence with regard to future trading conditions, the company has announced the payment of the interim dividend (6.5 cents fully franked) will be brought forward to 24 June 2020. The company’s strategy and growth plans remain unchanged.
Earnings changes: Following the update, our FY20 earnings forecasts remain largely intact. We upgrade FY21/FY22 earnings forecasts by 6%/3% respectively.
Financial position: SNL’s financial position remains strong. At the end of 1H20, the company had total debt of $9.9m (net debt $9.7m), a gearing ratio (net debt to equity) of 24% and net interest cover of 7.9x.
Investment view: The resilience of the commercial vehicle after-market parts business is an endorsement of SNL’s position and strategy. SNL has a strong track record of growth, driven by robust underlying industry growth, growth in the number of branches it operates, and market share gains. Despite the interruption to trading, its track record of growth looks likely to remain intact. We upgrade our price target to $4.50, from $3.60 previously, which equates to a FY21 PER of 18.9x, a 10% premium to the Small Industrials PE of 17.1x.