Buy Date: 17th Aug 2023 | Price Target $1.50
Stock Note:
24th June 2024 | Share Price $1.67
VEE has provided forward guidance that they expect 2HFY24 revenue, earnings, and profits to be inline with 1HFY24 of $38m, $7m, and $3.5m respectively. This is inline with market consensus that revenue and profits for FY24 will be $74.8 and $6.4m respectively. As such, and VEE trading on a current PE of 55 and having a forward PE of 38. The market has priced in future earnings to VEE’s current share price and any pull-back to or below $1.50 is a price I’m happy to buy more shares at.
9th December 2023 | Share Price $0.89
Share price has run hard this year, up 57% on original investment. Will be waiting for further financial updates to see if they are on track to meet expectation. Think they are overvalued currently and future upside is being priced into their share price. I have long-term price target of $1.50. Possible buying opportunities on any share price correction or weakness from here.
Smooth Seas Ahead
11th September 2023
Veem Ltd (ASX: VEE) are a Perth based engineering firm specialising in marine propulsion and stabilisation systems for the global luxury motor yacht, fast ferry, commercial work boat, and defence industries. Although the Group is managed as a single business segment, it can be broken down into the following sales categories: Propulsion and Stabilisation, which comprises, of the manufacture of new propellers, shaft lines, gyrostabilisers and marine ride control fins, Defence, and Engineering (non-defence). VEE’s main area of competitive advantage is their continued in-house R&D, allowing them to release and specialise in new and efficient technologies, with their world class gyrostabiliser and propeller products receiving ever increasing demand both at home and internationally, testament to their R&D abilities. VEE’s main area of focus is the development, marketing, sales and support of their products and services. COVID initially benefited VEE but as supply chains, availability of materials and labour were impacted by COVID, reducing VEE’s ability to do business and market their products, it hurt their bottom line.
FY22 was their worst year for some time with profits falling from $2.4m in FY20, $4.9m in FY21 to $1.27m. FY23 has seen profits return to previous levels coming in at $4.1m, indicating that things are on the improve and the worst is behind them. This has been reflected in their share price as it has gone from circa high of $1.40, low of 40c, to its current 63c, in this time.
Things were heading in the right direction before COVID hit and impacted VEE’s ability to do business, and now after their FY23 numbers, it looks like things are on the improve again with revenue, profit, and margins increasing and getting back to their pre COVID levels, with this flowing through to EPS in FY23. Looking forward, operating profit and margins will be key as businesses get use to operating in a higher cost and inflationary environment post COVID, with businesses that keep a lid on costs and maintain or improve margins, set to do well. On the back of their FY23 numbers VEE look to be navigating the post COVID environment well and if this continues, they will perform solidly in the future.
Management have performed well with the key liquidity ratios all remaining relatively consistent and at solid levels for an engineering company; Generally engineering firms have longer product cycles and therefor cash cycles than most companies. This is due to the longer time frames and higher costs associated with R&D, sales, manufacturing, and delivery/installation of their products before payment is received. We can see working capital has increased over the years as VEE have grown their business by increasing capacity. A large part of this has come in the last two years as capex per share levels have increased to 3.6c, significantly higher that previous years. In a market release on 24th August 2023 VEE’s MD Mark Miocevich noted:
“Importantly, VEEM invested $9.6m in capital and development assets during FY23 which will deliver improved returns for shareholders into the future through increased capacity, efficiency and product development. As always, VEEM’s R&D spend was significant at $2.8m for the year – another investment into the future of the company.”
This capex spend included three new propeller machining centres, associated equipment and tooling, with May and June FY23 each recording a new record for propeller sales as a result.
This capex has resulted in lower or negative FCF over the past 2-years and should start to improve as the intense capex spend reduces over the following years. As we are about to see in the next section management have elected to fund this growth mostly via debt as shares outstanding only increased by 5.7m over the last 6-years, a good sign management is on the same side as shareholders.
Debt levels sit at a comfortable level and have remained relatively consistent, except for FY20 which sore the onset of COVID, where companies looked to reinforce their balance sheet through increased debt and/or equity raisings. VEE has managed to reduce debt levels from their peak in FY20 significantly and return them to more sustainable levels, but for me there is still work to be done here and I would like to see management make an effort to reduce debt further or at the very least maintain current levels . VEE’s healthy interest coverage ratio of 5, along with, their sold liquidity ratios indicate that they will not have any issues maintaining current debt levels and meeting debt repayments.
VEE’s management have been prudent with their dividend policy and have balanced the demand of shareholders and the requirements of the company by maintaining a dividend cover ratio of between 3 and 4. This has been reflected in dividend growth being inconsistent, but when profits have allowed VEE have increased their dividend payments. Ideally, as VEE’s performance becomes more consistent their dividend payments will become more stable and reliable.
VEE’s performance here has been solid without being fantastic either and once again things were heading in the right direction before COVID. Given the high-cost low margin nature of their business if VEE can generate high single digit to low double-digit growth on assets, equity, and capital, while increasing revenue and maintain or increase margins, they will manage to generate health returns for shareholder. With this being a key minimum benchmark for continuing to hod the company, in my mind.
Depending on how you look at VEE they are either expensive or cheap. I bought them at 57c, and they are now 68c and up 20%. Basically, if you believe (like me) they are positioned to benefit from their R&D lead competitive advantage and demand for their products for some time to come, they are cheap or due to their small market position, high-cost low margin business, and low returns on assets, capital, and equity, they will struggle to create value for shareholders and are expensive.
Consensus forecast and estimates have revenue for FY24 and FY25 at $66m and $74m respectively with profits at $4.4m and $6.0m and EPS at 3cps and 5cps respectively. Highlighting, VEE are set to continue their growth path, with smooth seas and sailing set to continue. For anyone further interested in VEE and where they see themselves positioned in the market I would encourage them to read their outlook statement in their FY23 report: https://veem.com.au/investors-and-media/financial-reports/
Disclaimer: Rational Share Investing With Ratios does not hold an AFSL and information on this site should not be considered financial advice, personal or general, and represents the views of the author.
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