VEEM Ltd (ASX: VEE) is an Australian company listed on the ASX since 2016 and founded over 50 years ago. We are publishing this Veem stock analysis at the request of one of our supporters. You can find our past analysis of Veem here.
Veem is a designer and manufacturer of marine propulsion and stabilization systems for the global luxury motor yacht, fast ferry, commercial workboat and defense industries. It operates from a 14,700sqm purpose-built fabrication and manufacturing facility out of Perth, WA, and employs approximately 180 staff.
Although the Group is managed as a single business segment, management breaks up their revenue into 3 major categories; manufacturing of propellers & stabilization products, defense and engineering products and services.
VEEM’s 2024 FY results released in August 2024 were very impressive. Revenue was up 35% to $80.5m, net profit after tax (NPAT) was up 70% to about $7m, and free cash flow was about $3.5m (after lease repayments), up on a small amount of cash burn last year. This all flowed through to stand out earnings per share and a significantly increased unfranked dividend of 1.54 cents. That implies a trailing yield of about 1.16%.
The increase in NPAT was driven mainly by a good rebound in gross margins which have been improving steadily from lows in 2022 of 50.91%, to the 2024 FY result of 59.61%.
But the question is; what is driving Veem’s margin improvement?
My first inclination is to look into the revenue mix over this 5 year period, and whether a significant shift in this has brought about the rebound in gross margins. As can be seen from the chart below, it may be in part due to Defence revenues – which can often be a race to the bottom for award – being a smaller portion of income.
But this correlation does not seem to be too strong. To me, it looks as though gross margins were impacted heavily by COVID19, with 2021 & 2022 being the 2 years that were affected most by the pandemic. After this, you can see Veem’s gross margins have improved.
One other possibility is that the mix of products sold within the manufacturing of propellers & stabilization products segment could have been more favorable, particularly as management do call out an increase of 147% in the sale of Gyro Stabilisers in 2024. Without a further breakdown of revenue however, it is difficult to draw a conclusion on this front.
Customer concentration for VEEM can be seen as a risk, and the company is struggling to diversify its customer base. For example, the largest two customers have contributed between 23% and 37% of total revenue over the last few years.
If revenue from defense contracts is included in this calculation, the top 3 customers in 2024 contributed to 56% of revenue. This is certainly something to keep an eye on moving forward, as a loss of one of these customers could lead to a significant drop in revenue for the company.
Turning to VEEM’s balance sheet it can be seen that in FY 2024, total debt for the company fell 17% from $14.1m to $12.5m. While it is a good thing that debt is decreasing, an interest bill annually of over $1.3m is a slight concern for me. This, coupled with the amount of cash on hand at the end of the 2024 FY of only $170k and with over $1m in dividends to pay out, has me a little cautious. I am always wary of companies that fund dividends through borrowings, something that may have likely occurred on payment of the dividend in September 2024. Another slight worry on the balance sheet for me is the minor build up of inventory in 2024, which is up 12% on the 2023 FY to $23.4m.
Bizarrely, Veem persists with paying a dividend despite the fact that this extra cash could be used to pay off debt, thus opening the door to refinancing at lower interest rates.
Veem Leadership
Brothers Brad and Mark Miocevich look to be the driving force behind VEEM. Both brothers have been involved with the company for over 40 years, and together they own 68.1m shares, or just under 50% of the shares on issue. While this is fantastic when it comes to shareholder alignment given the amount they both have at stake in the business, insider ownership this high can sometimes lead to peculiar outcomes. For example, I would argue that the most prudent use of cash at this point would be to reduce the high amount of debt on the balance sheet.
The real wild card for this business came about in October, 2023, when VEEM announced it was partnering with Sharrow LLC to manufacture and commercialize Sharrow propellers. These propellers have a patented loop-shape propeller design that claims to improve fuel efficiency, provide a significant reduction in vibration and noise, provide an improved handling experience, and finally provide excellent reverse thrust.
The deal sees VEEM secure the licensing rights to manufacture and commercialize this technology for all Sharrow propellers globally up to 5m in diameter. That covers the entire range of inboard recreational yachts, commercial, military vessels and ships up to about 91m worldwide.
While these Sharrow propeller claims are certainly impressive and quite possibly revolutionary for the propeller industry, the reviews surfacing online are mixed.
A Youtube channel called ‘Florida Boat Guy’ conducted an independent review of the Sharrow inboard propeller which has garnered around 39k views.. He completed a number of tests on the Sharrow propeller in open water conditions and ‘Did not see any fuel efficiency benefits, let alone the 25% efficiency improvements that are advertised’. He however completed a 2nd review of the propeller 2 months later with a few adjustments and got 12% more fuel efficiency than his regular propeller on this 2nd occasion. While this was not the 25% advertised, it was a pretty good result nonetheless.
On the other hand there are reviews such as this on boating forum ‘downeast boating forum’ that states that a charter boat since switching the the Sharrow propeller has seen that ‘his fuel consumption has dropped by 25%’ as well as noting that the engine is much quieter and produces less turbulence.
Another talking point among potential customers online is the price point of these Sharrow propellers, with some stating the price of these propellers is $5,000 USD. This is at the higher end of the custom made, high-end propeller price points.
While doing some research i found the following price ranges from different online sites:
- Mark’s High Performance Propeller: Custom propellers can range from $1,000 to $3,000 or more, depending on the specific requirements and customization.
- Nettle Props: Offers a variety of custom inboard propellers, with prices typically starting around $800 and going up to $2,500 or more.
- Get A Prop: Custom inboard propellers from brands like Nakashima, Hung Shen, and Michigan Wheel can range from $1,200 to $4,003.
While there is no doubt that enthusiastic boat users will still be willing to pay a much higher price for a superior product, I believe the price point does limit the target market for VEEM. Any efficiencies they can drive through the manufacturing and commercialisation process to bring this price point down could open up a larger target market, and therefore much higher potential earnings as a result. While this part of the business is certainly exciting and has a lot of potential, some of this potential is arguably already baked into the current share price.
At a share price of $1.32, the market cap of VEEM sits at $183m. This share price puts the company at a trailing twelve month price to earnings ratio of approximately 26. For a manufacturing company, this is a little too expensive for me to pay, even with the potential blue sky of the Sharrow partnership.
VEEM has shown some fantastic revenue growth and an impressive rebound in margins to post record FY 2024 numbers. It has a lot of the characteristics I love in a company, but the main sticking point for me is price.
The market seems to be pricing in a little too much upside at the current price, and I am mindful of how volatile earnings have been over the last few years. Once I consider the debt, mounting interest payments and a low cash balance, I can’t get overly excited about Veem, though it does deserve a spot on my watchlist.
As LLM-generated guff floods our synapses, the back and forth between reader and writer is even more valuable than before. So, my new number one priority is to cover any companies my Supporters wish to read about. And so, here is a “Small-Cap Mailbag” article, where we write about a company in response to a Supporter request. I encourage Supporters to send me the name of the small-cap, micro-cap or nano-cap stock you would most like to read about! Simply reply to any Supporters-only email from A Rich Life or email [email protected].Disclosure: The author of this article Benjamin Sayers does not own shares in Veem (ASX: VEE). The editor Claude Walker does not own shares in Veem (ASX: VEE). Neither will trade Veem (ASX: VEE) 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 Equity Story Pty Ltd (ABN 94 127 714 998) (AFSL 343937).
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