Veem is an industrial/engineering company that mainly constructs marine equipment for larger-scale vessels. However, Veem is not just another industrial company. They also manufacture gyrostabilizers, which are their drawcard product. While other companies make gyrostabilizers, Veem manufactures the most powerful gyrostabilizers globally. This puts them in a strong position for growth in a market that they say is worth US$14.6 billion.
This is a guest post, by Aleck Arena.
What is a gyrostabilizer?
Gyrostabilizers are a new cutting-edge technology that stops boats from rocking, and most importantly, for people like me, they reduce seasickness. They offer many advantages over fins, including their use at any speed and weather conditions. They are also safer for swimmers as they are not sharp. They won’t get damaged if a boat is grounded or hits something. They reduce drag which results in higher hull efficiency. They don’t require maintenance and are easier to install. They also vastly improve the ease at which large vessels and ships can be docked, providing better manoeuvrability for drivers.
Are Veem Management Well Aligned With Shareholders?
Veem has significant insider ownership with Mark Miocevich, the company’s CEO currently holding 50%, even after dumping $14m worth of shares at $1.18 each on gormless buyers in September 2021. At the same time as the CEO sold shares, the company issued new shares at $1.18 per share. Six months later, the share price is some 45% lower at 65 cents per share. If the maxim “once bitten, twice shy” holds true, institutional investors may be extremely cautious about supporting the company in the future.
That said, the significant remaining Miocevich family holding provides ample incentive for the board to restore the share price to its former glory, given the time and opportunity.
Veem is currently the go-to company in Perth for all significant marine needs. They are already affiliated with Royals Royce, Austral, ASC and SupaCat, to name a few. They produce a range of quality products that have the potential to build their brand both domestically and internationally and increase market share.
Why did Veem’s most recent half year result disappoint the market?
Veem’s weak set of half-yearly results showed weak revenue down 7.4% to $26.3 million, and a terrible reduction in profit. In fact, Veem reported NPAT was down 83% to just above $300k, due to a variety of factors. These factors include:
- Their defence contracts with ASC and Austal were down significantly (as expected). Veem said they are set to commence a contract with ASC in April 2022. While they have confirmed these ongoing contracts, there is no certainty as to the quantum, and the current contract periods are likely to generate less profit than past contracts with the same customers.
- The prices of materials and labour have significantly increased due to Covid’s effect on material and staff shortages. This has led to an erosion in margins. According to Mark Miocevich, the CEO and major shareholder, they were restorable to pre Covid levels, with the inflation of materials and labour being built into all quotes going forward.
- Staff shortages have affected the company’s ability to take on new work, meaning there has been little additional revenue this financial year.
- Border closures have affected the company’s ability to source labour from interstate and overseas. It has also influenced their trade internationally, which has reduced their growth.
Based on annualising Veem’s half year profit of around $0.3m, the stock is on well over 130 times earnings. However, in FY 2017 to FY 2021, the company averaged pre-tax earnings of $4.42 million. If we apply a 30% tax rate, we get about $3m, which might be a sustainable average level of net profit after tax for the business, if we believe the current adverse conditions are ephemeral.
Based on this $3m estimate, Veem would currently trade on about 30x earnings, with a market cap of about $91m at a share price of $0.65.
Given recent economic growth and the current COVID climate, which has impacted our ability to travel, we have seen an unprecedented spend in the luxury boating sector. Bloomberg recently wrote an article entitled “Worlds super-rich drive 77% surge in superyacht sales last year”. The article explains that in 2021 superyacht sales crushed the previous all-time high, with sales doubling since 2019 and increasing 77% from the previous year.
The superyacht sector is controlled by the world’s super-rich, who gained 1 trillion dollars last year in a low-interest rates environment and when isolation was encouraged. This led to a period of rapid sales growth and high demand for luxury yachts, where demand significantly outweighed supply.
This has reportedly resulted in a backlog of orders for yachts yet to be made. Impatient buyers, who have been unable to secure new yachts, have looked to purchase second-hand luxury vessels, increasing demand in this sector. With more superyachts (both new and second hand) being manufactured and refurbished, more often than not with gyrostabilizers, there has been an increase in demand for gyrostabilizers. This should provide a tailwind for Veem. However, it is also possible that a changing economic climate could lead to less demand for superyachts, or even the cancellation of orders.
The reasons for Veem’s poor performance in the past 12 months, i.e. staff shortages, border closures, reduced margins, could continue for an unknown period, or they could ease. Zooming out, Veem has a solid gyrostabilizer product amidst a luxury boating boom, with a backlog of orders for various Veem products, and a relatively steady income stream in defence and engineering contracts.
As a result, I would argue Veem is a business with reasonable long term prospects. I believe it deserves a spot on your watchlist. However, the lumpy earnings and inflationary pressures mean that arguably it is quite high risk and ought to be treated with some caution.
Editor’s note: shortly after publishing this article I received some fairly apt questions about whether Veem can achieve much growth outside of yachting. One potential source of over-optimism around this company is the idea that it can expand much beyond yachting. The reason gyrostabilisers are more of a priority for luxury yachts is because, essentially, they are a luxury. For example, a tug boat would not need a gryo-stabiliser. This article is rightly focussed on the yachting use case, but it’s worth mentioning that the company might undermine itself by promising growth in other areas, then failing to deliver.
Please remember that these are personal reflections about a stock by the author, Aleck Arena, who does not own shares in Veem at the time of writing. This article should not form the basis of an investment decision. It is an investment diary valuable only for the cognitive process it demonstrates. We do not provide financial advice, and any commentary is general in nature. Please read our disclaimer.
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