Last night, bus and truck parts distribution company Supply Network reported its results for FY 2025. The headline results were revenue up 15.5% to just under $350 million and profit after tax up 21.2% to just over $40m. Diluted earnings per share were up 18.2% to 92.7 cents, due to slight dilution arising from the popular dividend reinvestment plan.
These results show both strong growth and positive operating leverage, with profit growing faster than revenue for the full year.
However, I track half-yearly net profit before tax (NPBT) and NPBT margins to assess the health and quality of the business over time. As you can see below, the second half was pretty flat compared to the first half, on both measures.
Now, I don’t want to take anything away from the extremely strong margins. Back in 2019, Supply Network already had solid NPBT margins for a distribution business, in my opinion, and you can see how much margins have improved since then! Maintaining NPBT margins over 15% shows solid operating efficiency and a fairly orderly market.
In terms of the half-on-half half NPBT growth, it is true that the second half was pretty weak, but soo too was the first half of FY 2024. For this kind of business, we should not expect strong growth every single half. That said, I would like to see half-on-half NPBT grow more strongly in the next half.
Operating cashflow was up strongly in FY 2025 to $32.2 million, but that is largely because of the strong H1 FY 2025 cashflow result. After subtracting lease costs and investing cashflow, shareholders were left with free cash flow of $24.8 million (up on just $6.3m in FY 2024).
This allowed the balance sheet to improve to a net cash position of $14.9m as at 30 June 2025, up from net cash of $11.9 million at the end of the first half, and a net debt position one year ago.
Still, this full year free cash flow result was only 62% of net profit after tax, reminding us once again that Supply Network is a fairly capital-intensive business, and ergo, not the highest quality stock.
Despite that, Supply Network has an enviable track record of good operating performance, improving margins (as above) and growing dividends. At a share price of $41, Supply Network trades on a trailing fully franked dividend yield of 1.7%; significantly less than when I recommended the stock.
Indeed, the company has once again declared a ceiling price for its dividend reinvestment plan. This time, the ceiling price is $38, some 7.3% below the current share price of around $41. As a result of this discount (and my aversion to unnecessary administration) I will therefore leave my dividend reinvestment plan (DRP) instructions in place, and thus I will participate in the despite the fact that Supply Network is a Hold recommendation.
Given, I have twice taken profits from Supply Network, I have effectively just profited from the outsized discount that is a feature of the Supply Network DRP. Even though that might not work out in the future, if the share price drops, I’m willing to take that risk. You see, even though I think Supply Network shares are a bit too expensive to buy, I don’t think they are bad value.
Supply Network is an unusual company in that they do not really do much by the way of market communications. In fact, plenty of the information in this report had already been released to the market in the FY 2025 profit announcement and the operational update, both released last month.
One of the major expenses for a distributor like Supply Network, is the cost of building and maintaining distribution centres. As such a distributor grows, it must constantly look to physically expand its network.
In that spirit, Supply Network said that “Around the beginning of July 2025, we also commenced distribution from our building extension at Truganina, Victoria. This was developed to enable us to relocate the distribution of some products away from Pemulwuy, NSW, which has been operating at above its design capacity throughout FY2025.” Therefore, I expect increased distribution costs and potentially lower margins in H1 FY 2026.
Looking forward, the CFO Robert Coleman commented that “For FY2026, we have targeted similar revenue growth of around $50m. This will be challenging, especially in a year when we will be transitioning to a new version of our Enterprise Resource Planning software and an entirely new sales interface.” Since ERP transitions are notorious for leading to delays and cost overruns, I wait with bated breath to see if they can deliver on this promise over the year ahead.
Overall, FY 2025 was a slightly weaker year than usual for Supply Network. Revenue growth was a bit slower than before, and margins contracted slightly in the second half. Growth remains capital intensive but the balance sheet is healthy and able to support that growth.
Probably the easiest way to show how Supply Network stock has become more expensive is just to look at the P/E ratio. When I issued the original buy recommendation, the P/E ratio was around 21 and the share price around $13.
At the current price of about $41, the P/E ratio is now over 44! Sure, profit has continued to grow nicely, but it was growing nicely before. The inescapable truth is that the market is just a lot more optimistic about this stock than it was before, despite growth rates remaining fairly steady.
On a sociological level, the stock is now coming to the attention of a lot more small-cap fund managers. Before long, as they write about it in their reports and mention it to newspaper reporters, the stock is becoming better known.
From 24 March 2025, Supply Network joined the ASX 300 index, so it is now included in the most common benchmark for small-cap fund managers.
Since directors have been selling shares from time to time, as covered in the April sell some, hold some recommendation, the stock will become more liquid, and it may enter into the ASX 200 in due course.
Speculation about this can support the share price now, as funds jostle to benefit from the (potential but not guaranteed) uplift arising from future inclusion in the ASX 200.
I have previously issued recommendations to take some profits at around $35 (20% of the original position size) and around $38 (another 20% of the original position size), based mostly on valuation. However, I do see potential for further upside as the market bestows increasing attention on the publicity-shy Supply Network, which trades as Multispares.
Therefore, while I continue to view the Supply Network share price as rather optimistic, I’m not in a hurry to take more profits too quickly. After all, it seems that the business is performing well and being managed for continued long-term, sustainable growth; and the stock price just kept going up after the last two times I took profit!
Therefore, given we have already taken some profits, and given the long-term potential for growth and seemingly honest & competent management, Supply Network remains a Hold recommendation.
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Disclosure: the author owns shares in SNL and will not trade SNL shares for 48 hours following this article. 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 Ethical Investment Advisers Pty Ltd (ABN 26108175819) (AFSL 276544).