In February, Supply Network (ASX: SNL) reported its results for H1 FY 2025, marginally beating my revenue, profit before tax, and profit margin expectations. Revenue was $171.2 million up 17.8%, and profit before tax was $28.2 million, up a whopping 31.5%. This strong profit performance was thanks to the net profit before tax margin increasing from 14.74% in H1 FY 2024 to 16.5% in H1 FY 2025.
Profit after tax was $19.8m, an increase of 31.6% on the prior corresponding period (pcp). This translates to basic earnings of 46.2 cents per share, up about 28.3%, which is less than the profit growth, due to dilution associated with the discounted dividend reinvestment plan. The interim dividend declared was 32 cents per share, being a 69.3% payout ratio.
Net operating cashflow was massively improved, coming in at $20.35 million compared to $7.8 million in the pcp. After subtracting net capital expenditure and lease repayments, we were left with almost $15.8 million in free cash flow which was a great result. This bolstered the cash balance, which strengthened from net debt of $3.75 million to net cash of $11.9 million.
This result included $3.25 million in one-off property sale proceeds, but would have been relatively pleasing even without that gain, since Supply Network is fairly capital intensive, and free cash flow tends to lag profit as inventory grows. To wit, inventories were up about $12m from ~$103m to ~$115m over H1 FY 2025. As always, the reality is we’re storing our profits, at least partially, in truck parts!
Key Takeways from the H1 FY 2025 Supply Network Management Commentary
As I previously mentioned, margins were strong in H1 FY 2025. The company said:
‘Gross margin improved ~2.3% on the prior corresponding period. Roughly half this increase was a recovery of margin lost during peak inflation and the other half was a result of improved sourcing, particularly improved access to critical high-quality products.’
Management showed why I consider them to be high quality operators with the following paragraph explaining why they have been compelled abandoned their “FY 2023 3-year plan” due to achieving its goals too quickly:
“At the end of FY2023 we talked about our new 3-Year Plan, including “new investments we need to support revenue of $350m … within 3 years”. Following stronger than expected sales growth over the first 18 months of this plan, we will go close to $350m revenue in the current financial year, so we have commenced work on our next 3-Year Plan, one year early. This new plan will include investments needed to support revenue of $450m by FY2028. We note this is only a plan, but with good planning good things become possible. We will provide more details at the end of this financial year.”
Please note this is not guidance and so I would not consider it to undermine their credibility if they do not achieve it.
Sadly, I couldn’t see any update on the ERP system upgrade, so I assume there is no good news to report, and I remain alert to the risk of further delays.
Dividend Reinvestment Plan (DRP)
As I have noted in my previous coverage, despite downgrading Supply Network to Hold about a year ago, and subsequently recommending that supporters Sell 20% and Hold The Rest, I have always disclosed that I automatically participate in the dividend reinvestment plan. The reason for my participation in the DRP is that the company deliberately sets it at a low price (most recently a deemed stock price of $32, compared to a prevailing share price of around $38). It would therefore make more sense to reinvest and then sell than it would to simply take the dividend. I just leave it on automatically all the time because I avoid unnecessary administrative tasks like the plague. I did recently receive my DRP shares.
Supply Network Valuation and Sociological Observation
In my most recent commentary on Supply Network, I wrote:
Now, Supply Network usually has a stronger second half, but since the gain on sale of the property won’t be repeated, the profit skew will probably be smaller than last year. I would therefore argue that profit after tax in the second half will be less than $23.2 million, which means full-year profit after tax will be less than $43 million for the full year. Indeed, I’d probably estimate that profit after tax comes in closer to $39 million, which would already be an impressive growth rate of around 18%.
At the current Supply Network share price of $38, the company has a market capitalisation of about $1.52 billion. These results were a little bit better, in terms of margins, than I had expected, though the actual NPAT result was very close to what I had expected. Even if we bump up my estimate to $40m for the full year (and I personally am sticking to my earlier estimate because I like to be a bit conservative) then Supply Network is trading on about 38x FY 2025 profits.
I also note that Supply Network was recently included in the S&P ASX 300, as of March 24, this year. This could well explain the fairly resilient share price as its inclusion would mean certain passive funds, and certain index-hugging fund managers who benchmark against the ASX 300, would buy shares in the stock, potentially pushing up the price.
Whatever the proximate causes Supply Network stock is clearly more expensive than it has historically been. I am considering whether to recommend that Supporters take more profits or whether to maintain the Hold recommendation without any further profit taking.
I also think the sociological context is worth considering, with recent director selling adding to the prospect of Supply Ne will update Supporters in a separate post later today.
Disclosure: The author of this article owns shares in SNL and will not trade SNL shares for at least 2 days following the publication of this article. This article is not intended to form the basis of an investment decision and is not a recommendation. 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 343937).
The information contained in this report is not intended as and shall not be understood or construed as personal financial product advice. You should consider whether the advice is suitable for you and your personal circumstances. Before you make any decision about whether to acquire a certain product, you should obtain and read the relevant product disclosure statement. Nothing in this report should be understood as a solicitation or recommendation to buy or sell any financial products. A Rich Life does not warrant or represent that the information, opinions or conclusions contained in this report are accurate, reliable, complete or current. Future results may materially vary from such opinions, forecasts, projections or forward looking statements. You should be aware that any references to past performance does not indicate or guarantee future performance.