Hey friends, today I want to bring your attention to Superior Group stock review. Business Overview Source: Superior Group of Companies Investor Presentation – August 2021 / Three Strong Platforms Superior Group is made up of 3 key businesses – uniforms, branding solutions and business process outsourcing (BPO) solutions. Source: Superior Group of Companies Investor Presentation – August 2021 / Industries served by uniforms business The company’s legacy is in the manufacturing and sales of uniforms and related apparels to businesses across different industries. And sales of uniforms have remained relatively stagnant over the recent years. Source: Superior Group of Companies Fact Sheet – August 2021 / Segment Revenue Mix as of 12 Dec 2020 But the uniform segment still contributes the majority of 55% to the company’s topline, based on FY2020 results. On the other hand, its other 2 operating segments have grown relatively fast over the past few years. Source: Superior Group of Companies Investor Presentation – August 2021 / Building Our Footprint In Complementary Promotional Products and Branded Merchandise The promotional product segment has grown by more than 300% since 2017, its first full year since the acquisition of BAMKO, which brought about the successful venture into the promotional product segment. Source: Superior Group of Companies Investor Presentation – August 2021 / Strategic Diversification That Leverages Shared Resources & Optimizes Operating Margins On the other hand, the BPO segment, associated mainly with its call center, has grown at a compounded annual growth rate (CAGR) of more than 25% since 2015. Superior Group Stock Review: Financial Review Source: Superior Group of Companies Quarterly Report Q3 2021 / Operating Segment Information While the uniform segment contributes to the majority of Superior Group’s topline, its remote staffing solutions and promotional products segments are gaining shares over time. As a matter of fact, the latter two segments contributed more to the group’s bottom line than the uniform segment, if you take a look at the latest Q3 2021 results. Hence, the promotional products and remote staffing segments are becoming increasingly more important to the group’s business. Source: Superior Group of Companies Quarterly Report Q3 2021 / Condensed Consolidated Balance Sheets – Liabilities In fact, the company has a pretty healthy balance sheet, with long-term debt and pension liability combined working out to be about US$95 million. Superior Group Stock Review: Valuation Source: Superior Group of Companies Quarterly Report Q3 2021 / Revenue by Segments Before that, understand that the company has seen a surge in the sales of personal protective equipment (PPE) in 2020 and the earlier part of 2021, due to the Covid-19 pandemic outbreak. But the latest Q3 2021 results show that the PPE sales have tapered off. So, I think we can use this quarter’s results as a run rate of a full year’s top and bottom line for valuation purposes. Source: Superior Group of Companies Quarterly Report Q3 2021 / Operating Segment Information We will apply a 20% tax rate on the values of income before taxes for each of the 3 segments reported for Q3 2021. Also, we’ll use conservative P/E ratios for each of the segments based on industry comparables, the past growth rates and future growth guidance. Sum of The Parts Analysis Source: Superior Group of Companies Investor Presentation – August 2021 / Long-Term Goals Firstly, the company expects its legacy uniform business to grow at 12% CAGR from 2021 to 2025. However, Superior’s uniform business is not the industry’s leader based on growth and profit margins. Hence, we will assign a P/E of 15 to this segment to be conservative. Next, for its promotional products segment, it’s projected to grow at the same growth rate as the uniform segment at 12% CAGR. However, I believe the company may be able to grow this segment at a higher rate with acquisitions, taking reference from recent acquisition deals. But again, to be conservative, we will assign a P/E of 20. And finally, for its remote staffing or BPO segment, the company projects this business to grow at 18% CAGR. I think it’s highly probable, given the performance seen in the recent years, where the segment grew at a CAGR of more than 25%. To be conservative, we will assign a P/E of 20 as well. SegmentNet Income,Full Year ($ mil)P/EValue ($ mil) except per share dataUniforms$6.9415$104Promotional Products$12.4720$249Remote Staffing$12.5120$250==>Value of Company$603==>Value per Share ($)$37.45Source: Superior Group Q3 2021 Financial Results, Valuation Estimation by Carepital So, based on the sum of the value of each of the business segments, we estimate the value of the company to be about US$603 million. Thus, with 16.1 million outstanding shares as of the end of Q3 2021, we can derive the value per share to be about US$37.45. With the current share price of about US$25.50, this represents a 47% upside to our conservative fair value estimate for Superior Group at US$37.45 a share. Superior Group Stock Review: Why Valuation Is Depressed? Source: Yahoo Finance Superior Group of Companies / Stock Summary Despite the strong results the company is producing, Superior Group’s share price is trading at a Price-to-Earnings (P/E) ratio like a flat or slow growth business. I think the first reason is that the market may still view it as a slow growth uniform company. However, as discussed earlier, half of the group’s business is now operating at relatively higher growth rates. But these are masked together with its legacy uniform business currently. Moreover, many investors are becoming increasingly pessimistic about Covid plays. Well, Superior group recorded stellar results in 2020 and the earlier part of 2021 due to a surge in sales of PPE. Yes, no doubt this may not be sustainable on an ongoing basis, so we definitely need to discount that. Conclusion Source: Superior Group of Companies Investor Presentation – August 2021 / Over 100 Years of Excellence To conclude, I think Superior Group presents an interesting undervalued play with significant upside. Its rapidly growing promotional products and remote staffing businesses are masked by its legacy uniforms operation. While its business is not in some high tech areas per se, Superior Group is adopting technologies heavily, such as warehouse automation and robotic picking systems. And precisely the company is not in an overly hyped industry, that I think it’s being overlooked at the moment. Anyway, I hope what I shared with you today is useful. Do subscribe to the newsletter below for more tips and updates. 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