Veem
a fundamental analysis!
August, 08 2019
TICKER: VEE
ISIN: AU000000VEE3
SHARE PRICE: $0,5 AUD
MARKET CAP: $64M AUD
August 08, 2019
TICKER: VEE
ISIN: AU000000VEE3
SHARE PRICE: $0,5 AUD
MARKET CAP: $64M AUD
1. INTRODUCTION
So you want a long term compounder on your portfolio? So do I. And that’s why I’m bringing you Veem today.
But first of all, I would like to thank CarlyT from the Microcapclub for bringing this one to my attention.
2. BUSINESS OVERVIEW
2.1. BUSINESS DESCRIPTION
Veem Ltd. is a 51 year old Australian family owned company whose main activity has been centered around the manufacturing of ship propellers. Veem is also entering a very promising business line: The manufacturing of gyrostabilizers for mega yachts and offshore-supply-vessels.
How does a gyrostabilizer work? A gyrostabilizer works based on angular momentum. Basically, it’s a big metallic flying wheel spinning very fast inside a sphere which counters the rocking effect created by the waves on a boat.
2.2. LARGEST SHAREHOLDERS
Veem was founded by a second generation yusgolavian emigrant to Australia, the father of the current managers. After the founder passed away, his wife held on to the business for some time until the boys decided they wanted to take control. Their mother promptly stepped aside and handed them the helm with just one condition: That every month they would send her a check.
And here’s a video of the company’s history. If you get to the end of this write-up wanting to learn more about the company, I recommend you to come back here and watch this.
After watching this video, I think it’s fair to say that the company is being led by vigilant leaders.
The Miocevich family still holds 61,5% of the company.
The IPO was back in 2016 and it served to raise $25M of which $20M went to the family and the remaining went to inventory and working capital. The fact that the company went public without the need for it is something I dislike.
On top of that, I’d like to understand why the family decided to sell part of the business right before the launch of a major product that will certainly boost the company’s earnings.
I’ve sent an e-mail to the company where, among other things, I asked why did the family sell so early but I suspect they won’t be giving me a straight answer.
2.3. MANAGEMENT TEAM
Both Miocevich brothers are still at the helm of the company.
Their total compensation is perfectly reasonable with no variable amount, just fixed salary and pension benefits. In 2018, the CEO has earned $412K or 1% of sales. This is equivalent to €250K.
3. HISTORICAL CONTEXT
3.1. LONG TERM CHART
The IPO price was $0,5AUD and the current share price is…..$0,5AUD.
3.2. MARKET CAP AND SHARES OUTSTANDING
The company is now valued at $66M AUD which is more or less equivalent to €40M. A microcap.
The number of shares outstanding has been flat.
Note: All currency in AUD unless stated otherwise.
3.3. SALES - OPERATING INCOME - OPERATING MARGIN
As we can see, this company’s sales have been steady as a rock around $40M per year. I think it’s fair to say that in “normal” conditions we can expect the revenue from the legacy business to stand around $40M for the years to come.
The operating margin has also been around the low to mid teens, except for 2018 where this has gone down to the single digit mark due to several factors like the marketing expenses for the Gyro.
3.4. SALES BY GEOGRAPHY
68% of the company’s revenue comes from Australia.
3.5. SALES BY SEGMENT
And the largest segment is the Propulsion and Stabilization. I think we’ll be seeing this one grow in the coming years as they get more orders for the Gyro.
3.6. NET INCOME
The net margin has stayed around the low double-digits but recently the net income has declined to $2,8M.
3.7. CASH FLOWS
The Cash flow from Operations has been decreasing for the past couple of years having reached a negative level in 2018…
…because the company has been building up inventory in anticipation for high demand for the Gyro.
I’ve been reading about working-capital and one of the things I’ve learned is to keep an eye on inventories that out-grow revenues. Thornton O’Glove on his book “Quality of Earnings” alerts investors to this situation and goes even further to predict earnings decline whenever the inventory grows faster than the revenue.
With this in mind, I’ve decided to compare Veem’s inventory with its net income:
hummm, I would say that there might be a correlation there.
But hey, going even deeper on this inventory analysis, there are several kinds of inventory:
On an industrial company like this, there are raw-materials, work-in-progress and finished goods. Investors should be wary of finished goods inventory that is building up too fast. That means that the company hasn’t been able to sell its finished goods which means that there will be trouble in the following quarters.
On the other hand, if the build-up is taking place on the raw-materials side of inventory, it probably means that the company is experiencing an increase in orders.
Let’s look at Veem’s inventory composition:
We can see that, although the Work-in-progress inventory has had its spikes, growth is coming mainly from the “Goods for resale, raw materials and stores” category. What does this mean? Well, since this category includes several types of inventory I can only speculate… Based on the company’s reports, I would say that most of this growth is coming from the raw materials (mostly Gyro parts).
All of this to say that it’s quite common for a company to prepare and build up inventory ahead of a product release but that build up should lead to a growth in revenue. As we haven’t seen that happen, investors might be suspicious of the future success of the gyro.
3.8. DIVIDEND
The company has a strategy of paying out 30% of the profits as a dividend, a decision I don’t feel is the wisest, especially just two years after the IPO and with the rising debt on the balance sheet.
I’ve asked CarlyT about this and he has told me that it is usual for growth companies in Australia to pay a dividend.
3.9. PROFITABILITY RATIOS
Both the Return-on-Equity and Return-on-Assets have been historically high around 20% and 15% respectively. Given the profit decline in 2018, both of these ratios went down to the single digits.
3.10. BALANCE SHEET RATIOS
The current ratio indicates a healthy short-term liquidity while the debt-to-equity ratio tells me that the company has raised new debt in 2018. Most of this debt has been used to finance the increasing inventory.
And as we can see, the higher debt together with decreasing profits is leading to higher leverage ratio.
3.11. PRICE RATIOS
At a forward PE ratio of 32 this stock seems highly overvalued but I would argue that this is happening due to the increased costs we’ve seen recently and due to the prospects of higher revenue and profits coming from the Gyro.
4. GAINING PERSPECTIVE
4.1. INDUSTRY AND STRATEGY
When studying microcaps, investors should be looking at a lot more than just the numbers. The management team, their beliefs, way of life, where they spend their cash, all of these are important factors.
Fortunately today’s investors can get a lot of information from the internet. The company’s factory and headquarters are located in the Canning Vale in Perth, Australia and it look like this.
I’ve wandered around the factory on Google Maps and I didn’t see any sign of money ill spent like expensive cars or new shiny buildings. Everything is pretty frugal and low-profile like one wants on a microcap.
And this is the inside of the foundry where they manufacture the metal parts by pouring molten metal into molds.
If you’re like me and you have no clue how a ship propeller is made, you can watch the following video:
Having understood that part, what I wanted was to understand the Gyrostabilizer business.
After about 5 years of R&D the company has finally sold a handful of them and is now actively engaged in Sales & Marketing. They are aiming at the super yacht market as well as the commercial offshore and defence markets.
They have been extensively testing the Gyro with Damen, the second largest shipyard in Europe which has ordered their first Gyro just recently. They’ve also sold a few to the French superyacht builder Couach Shipyards and a couple of others.
It’s not easy to sell a new and expensive product to these shipyards. A lot of testing has to be done before they commit to buying the Gyro and this is an industry where the players prefer to wait and see if their neighbour is happy with a new product before committing.
That’s why the company has fitted this fishing boat with their smallest model and sent it to Europe to serve as a test boat for the past couple of years. It seems that the strategy is paying off.
On the latest report (H1 2019) the company has said that “Inquiries have changed from customers exploring the technology to customers now wanting a quotation to buy.”
Due to this increased interest, Veem as already leased a new building for the Gyro production. The new facility has production capacity of 100 gyros per year which the company deems to be more than enough for the time being.
The Gyro’s starting price is reported to be around €215.000 and it can go up to the €2,5M mark depending on the model. I couldn’t verify these numbers myself in time for this write-up so I’m basing my figures on other people’s words.
4.2. SEASONALITY
I’m not sure there is seasonality to the sales but there is definitely cyclicality to the sales related to the marine and submarine spending.
4.3. TYPE OF PLAY
I now expect that VEEM goes from a stalwart play to a growth play.
4.4. RISKS AND COMPETITION
There is competition in the propeller business but I’m not entirely sure about the competition to the Gyro business. The other major international player is Seakeeper but it’s gyrostabilizers are designed for small boats. Of course, one could install several of them but it seems that this option is more expensive than buying one Gyro from Veem. Competition is one of the factors I should be digging into to better understand the potential of the Veem Gyro.
The risks I see here are:
- Inertia keeping the big players from adopting a new technology.
- Loss of credibility if anything goes wrong with the technology.
- Patent Infringement lawsuit from somebody else.
- A competitor showing up with a better product.
- Too much debt.
5. OVERVIEW AND CONCLUSION
5.1. OVERVIEW
I have yet to add an industrial company to my portfolio. Veem seems to be placed exactly at the turning point between the conventional no growth company to a high growth, industry leading player with a long runway in the horizon.
A new and unproved line of business is always slow to ramp up, especially if each unit is priced around the hundreds of thousands of dollars, but on the other hand there is a significant market out there waiting to be filled and now seems the right time.
What I like and don’t like:
Don’t Like:
The fact that the family pocketed the proceeds of the IPO.
The fact that inventory is building up and sales are still flat.
The fact that debt is mounting while profits are going down and dividends are being paid.
Like:
The fact that this is a 51 year old company led by the founding family.
The fact that there is a new product with lots of potential.
The fact that Damen has spent a lot of time testing the thing and finally ordered one.
The fact that this can become a multibagger.
All of this to say that I am not through with Veem. I’ve sent some emails to the company, customers and investors in order to get a better understanding of the industry and potential for the Gyro. I’ll be following this one very closely and I’ll be updating it on the Facebook Group as I get more info on it.
In the meantime, you can join our community at our:
5.2. CONCLUSION
This section will be available to paying subscribers in 2019 when we launch the Portfolios.
Don’t forget to check our other analyses.
6. DISCLAIMER
The material contained on this web-page is intended for informational purposes only and is neither an offer nor a recommendation to buy or sell any security. We disclaim any liability for loss, damage, cost or other expense which you might incur as a result of any information provided on this website. Always consult with a registered investment advisor or licensed stockbroker before investing. Please read All in Stock full Disclaimer.
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