Sequoia initiates coverage on Veem with a price target of $2.09
Veem specialises in marine propulsion systems, serving global markets
Veem’s technology and strong market demand drive Sequoia’s bullish outlook
Sequoia Financial Group has initiated coverage on Veem (ASX:VEE), with a price target of $2.09 (versus current price of $1.82).
Veem is a $237m market-capped marine technology company specialising in propulsion and stabilisation systems. The company also produces bespoke products and services for the marine, defence, industrial and mining industries.
Founded in 1968 and headquartered in Perth, the company first listed on the ASX in 2016.
Operations comprise foundry, machining, fitting and balancing services, which have historically been focused mainly on Australia. However, these are now being supplied to customers across export markets as well.
Starting in 2001, the company began focusing on marine technology.
This effort was supported by the knowledge and skills gained from specific acquisitions and the company’s experience of working on the Australian Navy’s Collins Class submarines.
A quick look at Veem’s technology
Veem’s Gyro Stabilizers are advanced marine stabilisation systems designed to reduce the rolling motion of vessels.
They work by using a spinning flywheel to generate angular momentum. When the vessel rolls, the gyro precesses, creating a counteracting force that stabilises the boat.
The main components include a heavy flywheel, a gimbal system to allow the gyro to tilt, and a control system to manage the gyro’s operation.
Veem’s marine propellers, meanwhile, are high-performance propellers designed for various types of vessels, from leisure yachts to commercial ships.
They are custom-designed using advanced hydrodynamic principles to ensure optimal performance.They’re made from high-quality stainless steel or bronze alloys, ensuring strength and corrosion resistance.
Veem’s propellers are also globally known for their precision and balance, which leads to smoother operation and increased fuel efficiency.
Why Sequoia is bullish on Veem
Sequoia has a strong bullish outlook on Veem, driven by several key factors that show the company’s potential for growth and long-term success.
Market opportunity
In recent years, the global superyacht market has experienced robust growth, marked by an estimated operating fleet of about 9,233 vessels as of January 2021, according to Superyacht Times.
This fleet has grown at a compound annual growth rate (CAGR) of around 3% each year to today.
Key potential sales regions for VEE include Europe, the Americas, and the Asia-Pacific.
European shipyards currently dominate both the fleet and order book. However, the Americas have experienced a decline in new build activity over the past two decades, leading to the downsizing or closure of many shipyards.
In contrast, the Asia-Pacific region has seen growth, although Australia and New Zealand have seen a decrease in market share.
Cutting-edge technology
Firstly, Sequoia says Veem boasts an advanced intellectual property (IP) portfolio and a robust research and development (R&D) program.
The company’s products, which are well-recognised and patent-protected, are the result of advanced design and innovation capabilities.
The company’s world-class facilities and capabilities further enhance its market position.
Veem operates a purpose-built, 14,700 square meter fabrication and manufacturing facility in Canning Vale, Western Australia. This facility includes the largest non-ferrous foundry in Australia, with a crane capacity of up to 25 tonnes, and features cutting-edge robotic technology.
These high-quality standards have earned Veem a reputation as one of the leading global manufacturers of marine propellers and gyrostabilisers, along with other precision engineering products.
The gyrostabiliser market
A significant growth opportunity lies in the gyrostabiliser market for Veem, says Sequoia.
Veem’s gyrostabiliser business is poised for expansion as the technology continues to be adopted in the superyacht and commercial workboat market segments.
The market for large marine gyrostabilisers is estimated by Veem to be valued at approximately US$1.1 billion for new builds and US$ 13.5 billion for retrofits of the existing fleet.
“VEE is essentially the only major manufacturer in the large marine gyro market, with fully developed products in place to capitalise on this position,” says Sequoia.
Propeller market
Veem’s propeller business is also thriving.
Recent investments in new capacity and related equipment have enabled Veem to capitalise on this demand and improve manufacturing efficiency.
A solid propeller order book, positive customer feedback, and supportive industry reports all point to sustained global demand for Veem’s propellers.
The total addressable market for inboard propellers in Veem’s size range is estimated at US$ 2.6 billion, including an annual new build market of US$338 million.
“The propeller business continues to benefit from ongoing strong demand for its premium high- performance propellers,” Sequoia noted.
Customer and supplier relationships
Veem has built many long-standing customer relationships over the years, says Sequoia.
These relationships range from traditional interactions to highly collaborative partnerships, where Veem designs and manufactures products to meet unique customer requirements.
In FY23, Veem had two customers that each comprised over 10% of group revenue. The company has also developed a reliable global supply chain, creating a natural hedge for offshore sales and enabling it to ramp up production as needed.
Veem sources inputs from various countries, including the US, UK, Germany, Italy, China, and Malaysia.
Proven track record
Veem has a proven track record of profitability.
The company delivered strong sales and earnings results in FY23 and the first half of FY24, driven by robust demand for the high-performance propellers and disruptive gyrostabiliser products.
Net profit after tax (NPAT) for FY23 and 1H FY24 was up 224% and 92%, respectively, compared to the previous corresponding periods.
The company’s strong balance sheet also provides a solid foundation for future growth, says Sequoia.
Veem has significant undrawn credit facilities and gearing headroom available for future capital investment. In FY23, the net debt to net debt plus equity ratio was 34%, and interest cover was 6.0 times.
The business continues to generate positive operating and free cash flow, despite ongoing investments.
Experienced team
Veem’s highly experienced management team is another key strength, says Sequoia.
The company is led by senior executives with long histories at Veem.
The vendors of the Veem business during the IPO also continue to hold a large proportion of shares on issue, ensuring strong alignment between the Board, management, and investors.
R&D to drive company’s growth
Looking ahead, key milestones to track Veem’s progress include the upcoming full-year FY24 results due in August, and updates on the delivery of its new Sharrow design propellers.
Additionally, ongoing investments in R&D, facilities, equipment, and internal systems will drive future growth, says Sequoia.
“One of the purposes of VEE’s extensive R&D program is for the company to remain ahead of industry trends and potential disruption to the market,” the broker said.
“This could be a threat for VEE if it was unprepared, or an opportunity if it was ready to take advantage of any such emerging disruption.
“The VEE share price has delivered significant gains over recent periods.
“Based on current forecasts, we derive a DCF (discounted cash flow) equity value for VEE of $2.09 per share, with potential upside from material new contracts,” Sequoia concluded.
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