Supply Network Limited (Supply Network, the Group, ASX: SNL) imports and distributes truck and bus parts in Australia and New Zealand under the Multispares brand. The business employs 500 people, and offers related services including parts interpreting, supply management and procurement.

Favourable industry structure and strong market position

Supply Network operates within a favourable industry structure and has a strong market position under its Multispares brand as Australia’s largest and most diversified independent supplier of aftermarket replacement parts for trucks and buses. As a scale operator, Supply Network has well-established relationships with leading global component manufacturers that provides a stable platform for ongoing business investment.

Vast distances across the Australian continent, and an open economy drive significant diversity in commercial vehicle makes and models and present many challenges for replacement part suppliers. The Supply Network business model has evolved around these unique characteristics and challenges of the Australian and New Zealand replacement parts market under its Multispares brand. In meeting customer needs and resolving these unique market challenges, Supply Network is able earn a premium on pricing for its products and services, and superior investment returns for its shareholders.

Australia is the only nation on earth with a continent all to itself and to deal with the complexities of regional demand for commercial vehicle spare parts across vast distances and in remote areas, the Group has developed a decentralised management structure with a strong regional focus.

Supply Network has built depth in its branch network to enhance local decision-making and strengthen support for local requirements. The breadth of its product range, significant regional differences and a strong regional structure adds to the Group’s operating cost. However, Supply Network has substantial operating scale, which enables it to purchase products well and to operate efficiently by leveraging its investments in information technology and e-commerce. This keeps pricing competitive while the Group’s extensive branch network keeps service levels strong.

The cost of product failure in the commercial vehicle market, which is largely comprised of trucks and buses, is high. This is why Supply Network operates at the “quality” end of the aftermarket, with an emphasis on service delivery, and not on being the lowest cost provider of spare parts for commercial vehicles. In response to this market dynamic, Supply Network has built its reputation around reliable products, long-term relationships, and lowering fleet operating costs.

This market position, and the diversity of vehicle makes and models and the concentration of certain vehicles for particular tasks, creates considerable difference in the demand for replacement parts from one region to another and across different market segments.

In response, the Group has a deliberate regional branch focus and decentralised management structure that drives local decision-making, and strengthens support for local requirements, especially in decentralised and remote areas. This decentralised management structure and strong regional focus is a key competitive strength that supports premium pricing for commercial vehicle replacement parts.

Investing in profitable growth by expanding branch network

A new branch in outer north Perth, is expected to open in March 2025, and management have committed to a doubling of the size of the Illawarra branch. Further additions are under consideration in other high-growth regions.

The expansion of Distribution Capacity at Truganina in Victoria experienced delays with development approvals but construction has commenced, and the new building is expected to be operational by the end of this financial year. These projects combined with modifications to existing facilities should enable the Group to achieve annual revenues of more than $400 million. This compares to $303 million of revenue in FY24.

Fourteen percent long-term average annual revenue growth rate

Management anticipates that the Group’s long-term 14 percent annual rate of revenue growth will continue in FY25. This forecast is based on the lag between new vehicle model release and peak demand for replacement parts which provides a reliable window into future demand.

Beyond FY25, management anticipate the addressable market will continue growing at 5 to 10 percent per annum for at least a decade and market dynamics will continue providing opportunities for market share gains. These are impressive numbers, especially given that Australia’s GDP growth rate for the year ending 30 September 2024 was just 0.8 percent!

Furthermore, ongoing investment to upgrade the Enterprise Resource Planning system and its associated sales interface, enhance business intelligence capability and rolling out new scanning technologies to improve pick and pack accuracy, is planned to conclude in the first half of FY2026. This investment is expected to contribute to network profitability over the long term.

First quarter revenue is around budget levels and management report solid overall activity, including new enquiries and continuing strong margins.

Revenue for the first half year of 2025 is expected to be around $170 million and profit after tax to be in the range $19.5 million to $20 million. These estimates compare to FY24 revenue of $303 million and profit after tax of $33 million with a profit after tax margin steady at 10.9 percent. Profit growth will moderate in the second half as the Group absorbs costs for the new branch in north Perth and for expansions in Adelaide, which is now fully operational, and Illawarra, which will be operational around the end of the third quarter.

Growth remains a major commercial driver in Supply Network’s business model, while financial flexibility is maintained by low net debt, allowing management to adjust quickly to changing market conditions, and this has been a factor in Supply Network being able to win market share.

Supply Network has returned about 70 percent of profit after tax to shareholders in fully franked dividends throughout a period of elevated growth. This strong shareholder return bias is likely to support consistent shareholder dividend growth in the decade ahead.