"Despite the modest rise in the dividend (I'd love 10% dividend growth p.a from all my investments!) importantly, the DRP won't be in operation. That means we only need about 6% earnings growth in FY18 to surpass the record 17.6 eps from FY2014 - that looks a formality."
Don't get me wrong; I'm not despairing about a mere 10% dividend increase; while I prefer the cash in my hand, I also don't mind too much if it remains in the stewardship of people who can generate a 20% ROE (which is what SNL achieves) on that cash. (Because I cannot generate a 20% pa return on my capital.)
As for what this year might look like, earnings-wise, I don't think many people appreciate just how clogged and bottlenecked this business was during 2014 and 2015 in servicing the significant greater NSW East Coast markets from Wollongong to Newcastle.
And then in 2016 they were essentially running a duplicated cost overhead as the rolled out the new Sydney warehouse in tandem with the Gosford facility. DH2016's result was still affected by this cost drag, I expect.
So, the first real clear air that the Sydney DC has seen was in the half just completed, which saw a 50% profit uplift on pcp. The current half will also be the first December half where SNL's added capacity makes a full-period contribution, so I expect the current half-year will record another impressive profit increase... maybe not another 50%-style increase, but 20% to 25% is not beyond the realms of possibility, I don't think, provided the markets serviced by SNL remain reasonably stable. And then, even if the second-half, i.e, JH2018, is relatively unchanged on JH2017, it will mean that NPAT for FY2018 will come in at around $7.5m to $8.0m (corresponding to EPS between 18.5cps and 19.5cps).
"I'm wondering if the recent strengthening of business performance has anything to do with a rebounding resources sector, particularly now that SNL has enhanced the Perth branch. Though in reality, there are probably many growth levers that the company is pulling now - recent stores opened would now be starting to hit their straps, the $A has strengthened allowing better buying and the new Sydney DC is reportedly performing well. Of course when you only have 19 branches in Aus / NZ, adding one or two branches is reasonably significant to the overall business performance."
My guess is that 60% or 70% of the improvement is due to the positive impact of the Sydney DC, as discussed above, and I also understand - anecdotally - that New Zealand is absolutely humming (have a listen to the webcast of Fletcher Building's recent update to the market, wherein they talk about the construction-, and related, markets being at full capacity.).
But, as you say, there are multiple levers at play providing a tailwind for the business, currently.
"SNL remind me of a smaller version of Reece, the attention to customer needs, high level of service, availability of quality products ( as opposed to the cheapest) ....... Not to mention the longevity of management and the director ownership. Does anyone else see such similarities?"
When I first read your observation, my instinctive response was to dismiss it (for, after all, how can anything possibly be compared to The Great and Mighty Reece?)
But then I compared the actual financial metrics for each business, and - you are right - there are indeed some striking similarities:
- similar ROE's of ~20%;
- similar working capital requirements (~25% of Sales);
- similar long-term rates of organic growth;
- similar EBIT margins of 11% to 12% [although SNL's Gross Profit Margin is higher (~43%) than REH's (~33%), but this is offset by REH having greater scale economies, therefore its CoDB-to-Revenue is lower (~19%) than SNL's (~32%)];
- both companies account for their profits conservatively, with high rates of asset depreciation and high conversion of operating profits to cash flows;
- neither company is funded with debt (in fact, both boards seem to be quite debt-averse);
- both managements are decidedly under-stated, with no little "spruiking" or over-promotion of the prospects of their respective companies... there is zero evidence of focus on the share price, especially on short-term share price movements, but there is a lot of evidence of unrelenting focus on their businesses, suppliers and customers;
- both management teams have proven to be disciplined in their stewardship of the capital of the shareholders of their respective companies;
- both companies operate in economic sectors that tend to be cyclical, yet the financial performances of each company has proven to be remarkably resilient during cyclical downturns.
- both companies have created significant value for their owners over time
Of course, REH is a 40-times larger business than SNL.
Accordingly, it is valued by the market on valuation multiples that are at material premiums to SNL (something that is likely to always be the case:
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