Last week, truck and bus parts distributor, Supply Network (ASX: SNL) released its results for FY 2024 showing revenue from customers of $302.6 million, up 20%, and profit before tax of $33m, up 18%. As you can see below, the profit before tax margin increased from the first half to the second half, and the profit before tax in the second half was 20% above the preceding half. This suggests it was a mistake for me to downgrade Supply Network to Hold based on the slightly weaker first-half result (and increased share price), given it seems the lower rate of growth was only temporary.
Earnings per share came in at 78.3c, and dividends totaled 51c for the full year, a payout ratio of 65%.
Free cash flow was only $6.4m, well under the amount required to service the dividend. However, thanks to a large portion of shareholders reinvesting their dividend, net debt was only up a little bit, to $3.75 million. Furthermore, the company said that DRP Market Price in relation to the final dividend will be capped at $20.00 per share. This means that shareholders who reinvest their dividends get to buy shares at $20, rather than the $29 prevailing market price. Ergo, as with last time, I will be reinvesting my dividend. This is perfectly logical, as I consider the dividend reinvestment price more attractive than the market price (a whopping 31% discount).
The company commented that “as peak inflation moderates and supply disruptions dissipate, we expect our rate of growth to continue settling back towards a long-term average of 14% p.a. This growth rate is underpinned by increasing road freight volumes and vehicle complexity, and market share gains.”
This does imply growth will moderate from here. However, given I am a long term investor in Supply Network I do not plan to try to adjust the position. My intention would be to just let it compound as long as it is growing at a high returns on equity and the balance sheet remains healthy.
I note that the remuneration calculates based “total shareholder return, return on average equity, return on investment and other business objectives.” I note that the CEO was paid about $1m including performance pay, in what has been a very successful year. This all seems very reasonable to shareholders. Therefore I would support the remuneration report.
In terms of expansion, the company says, “For FY2025 we have committed to one new purpose-built site in the fast-growing industrial precinct of outer-north Perth, which is expected to commence trading around 1st March 2025” and “We expect the expansion of our Truganina DC in Melbourne to be completed and operational around the end of this financial year.”
Longer term, the company says “We anticipate the addressable market will continue growing at 5% – 10% p.a. for at least a decade and market dynamics to continue providing opportunities for market share gains.”
In the Supply Network FY 2023 results, the company said:
“Current investments in our operating network and IT systems, previously reported as extending over FY2023 and FY2024, are now scheduled for completion in FY2025. The main elements of these investments revolve around an upgrade to the sales interface to our ERP system and its supporting server environment, with primary goals to deliver transaction efficiencies, better disaster recovery, and faster, more secure platforms.”
Unfortunately, and just as I had feared, the company now says:
“In our last report we commented on specific investments to upgrade our Enterprise Resource Planning system and its associated sales interface, server environment and business intelligence capability. This work is progressing well but with care and is now planned to conclude in the first half of FY2026. We have a rolling test process in place with our primary software provider, and the engagement and feedback sessions have been effective.”
I respect the fact that they referenced their comments in the last report, given that they must surely be frustrated that the work is now more than a year behind schedule. You can see why investors often worry about time and cost blowouts when companies upgrade ERP systems. Unfortunately, the unfinished ERP upgrade will remain a concern until it is completed.
Sadly, the son of the founder Geoffrey Forsyth (who also sold some shares around a year ago) is stepping down as Chairman of the Board, after a fantastically successful tenure. On the upside, replacement Robert Fraser is well-credentialled, and his wife already owns over $4.6m worth of shares.
With the share price up almost 100% in the last year, and a trailing P/E ratio of more than 37, but a good long-term track record, I consider Supply Network a Hold, with the caveat being I will reinvest my dividend.
Disclosure: the author of this article owns shares in SNL and will not trade them for 2 days following this article. This article is not intended to form the basis of an investment decision. Any statements that are advice under the law are general advice only. The author has not considered your investment objectives or personal situation. Any advice is authorised by Claude Walker (AR 1297632), Authorised Representative of Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).