At Monash we focus all our attention of finding stocks with compelling investment cases and during reporting season a particular highlight for us was Silver Chef (SIV) which delivered a result well above expectations on the back of growth rates that even surprised us, thus confirming our investment thesis on the stock.
SIV is an equipment finance company offering an innovative financing option to small business. It offers a Rent-Try-Buy product which provides a novel solution to its customers as well as delivering fantastic financial returns to SIV.
SIV’s customer base is small business owners, ranging from startups to established businesses. Businesses of this size typically have limited financing options, with Banks generally unwilling to lend directly to the business. As a result the majority of these businesses are cash financed, usually out of the business owner’s mortgage. The other feature of most small businesses is that it nearly always takes longer and costs more than initially planned for any business to get up to speed.
SIV’s business pitch to its customers, is instead of taking money out of their mortgage to buy a new piece of equipment, rent it from SIV, try it and see if it works for you business, and then you have the option of buying it from SIV once you know it works out. This way the business owner still has their mortgage to draw down on if required, and have therefore de-risked their business. SIV only offer finance on business critical assets and these have relatively deep secondary markets so they are able to offload unwanted equipment, and due to the monthly rental rate of 4% generates EBITDA margins in the mid 60% range after impairment expenses.
So how does SIV meet our investment criteria
Insight:
Customer Behavior -The Rent-Try-Buy product is a financing option for small business that provides much greater flexibility to the business owner and helps to “share” the risk of purchasing new business equipment.
Drive by Boards to exploit opportunities – SIV has significant growth opportunities within its GoGetta division and Canada and in time other Geographic regions. Its product is unique on a Global basis and produces very attractive returns.
Growth:
During 1H16, SIV achieve 33% growth in rental assets (the lead indicator of revenues) on the back of record breaking growth in the GoGetta business and continued strong growth in the hospitality business. The newly established Canadian operations are now breakeven with a huge market opportunity still to be exploited.
Value:
Based on consensus earnings estimates (which we believe the company will easily exceed) the stock is trading on a 1 year forward PE of only 11.5x and an EBITDA multiple of 4.0x. Given the growth profile and strong balance sheet of this company there is significant valuation upside.
Event:
While we are not expecting any specific event from SIV over the coming months, it is clear that the business has tremendous momentum.