A write up from a few years ago (stock was 54c) but buy case still largely valid. Probably my top stock as it ticks a lot of boxes in terms of quality and still has a significant market opportunity to capture. Although I have taken some profits in the last few months due to cashflow requirements, I am unlikely to sell for any other reason and would look to add to my holding even at the current price.
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Veem is a fairly illiquid microcap that listed in October 2016 at $0.50. They listed with an established and profitable core business that was growing 5-10% p.a and the promise of a new gyro segment that would deliver significant upside. Unfortunately, as is the case with creating a new market, it has taken far longer than most shareholders are willing to wait. I believe that a turning point is coming, and this business will be a lucrative multibagger.
Background: VEEM is a family run engineering business that has been around for 50 years. Their core business is in specialist marine propulsion where they have created significant IP. They also manufacture bespoke products for the marine, defense and mining sectors. Many of their clients are repeat customers and the relationships have been built up over many years.
Propeller market: Veem uses Interceptor technology, a patented design that allows users to adjust the pitch of the propeller without having to take the boat out of the water (costly exercise). By fitting a strip to a groove on the edge of the propeller, one can optimise the performance of the vessel depending on varying conditions such as water temp, load weight etc. Veem Propellers are made using advanced robotic machinery - this allows the propellers to be made specifically for the vessel in question and identical propellers to be manufactured each time thus guaranteeing the same performance. This process sets Veem apart from its competitors
Gyro market: Gyro stabilisers are a fairly new technology that reduces the rolling motion by up to 95% when a vessel is at anchor, drifting, alongside etc. They are built for vessels ranging from 25-80metres (superyachts, ferries, tugboats, patrol vessels). This is fairly new technology and displaces current use of retractable-fin systems which are underwater appendages that extend from the hull – the disadvantage of these systems is that they create drag and so reduce running efficiency and are dangerous to swimmers/divers. They can also catch on underwater obstacles and are difficult to access for maintenance. Gyros on the other hand although more expensive to set up are easy to maintain and can be fit anywhere on the vessel.
Veem has no direct competitors in this space. Seekeeper is quite well known in the US but their products are designed for smaller vessels and according to management are of inferior quality and design. The addressable market includes the private super yacht market and commercial vessels. Currently there are 10,000 super yachts globally and approx. 150 superyachts are built p.a of which 90% use some form of stabilization. The cost of a gyrostabiliser is approx. 2% of the total cost to build and ranges from US$250k to US$1m depending on the size. The opportunity in commercial vessel is in offshore crew transportation and government patrol vessels. The current method of transporting crews offshore often leads to seasickness and use of helicopters is both costly and dangerous. Companies that can provide additional benefits to improve the comfort of their crew are able to attract employees in a competitive market.
Veem have spent the past 2 years building relationships with key European shipbuilders and designers. This has been mildly successful with Van der Valk shipyard now making repeat orders and Damen the leading shipbuilder in Europe launching a new offshore vessel called the FCS7011 which uses a Veem gyro. However, to date Veem have only sold a handful of gyros. This is a new technology and many ship builders are waiting to see the results from trials/early adopters before committing. This shift of mindset and acceptance of the new technology is taking far longer than anticipated. However, market players (agents, shipbuilders) that I have spoken to believe that although adoption is slow this technology will eventually become a standard design feature and Veem are very well placed due to their solid reputation in the industry. In the short term Veem continue to market their technology and believe they should have some longterm contracts in the not too distant future. Thy are in the running for a couple of tenders and so there are some small potential wins around the corner. The real catalyst will be for a shipbuilder such as Damen who build 200 ships p.a to design the gyro into future builds. If this happens the company’s earnings will be many multiples of where they are today.
Balance Sheet: The company has more debt than I like to see in a microcap, but this was utilised to support the investment in growth of the gyro segment. It is expected that this will reduce in FY20. The company currently pays out 30% NPAT (1% yield). Net Debt $12m ND:Equity 40% ND:EBITDA 3x Interest cover 5x
What attracts me to the company and gives me confidence in its ultimate success are the following key characteristics:
High gross margin – due to the bespoke nature of the products and IP behind the designs the company can demand a premium for its products. To date there have been zero warranty issues again confirming the quality of the products and long-term viability of these margins
High ROE – the company has generated ROE of 20% historically with the past 2 periods being the exception as earnings took a hit whilst they invested for growth. I expect ROE to return to these levels in FY20 and continue to grow from there.
Owner – operator: – Veem is a family business and management still own a majority stake – 61%. They are clearly incentivised for this company to succeed.
Barriers to entry: Veem has spent many years developing its technology and makes it very hard for a competitor to impact earnings in the short term. They are very well regarded in the industry for the products superior performance and are continually looking for ways to improve. Product IP is protected by trade secrets and production and assembly are done separately to further protect this IP
Limited downside and significant upside: because they have an established, profitable and growing core business, should the gyro business fail to gain traction the stock price will not fall to zero but likely trade at a discounted market multiple. On the flip side should the company achieve its objective of “world domination” the earnings will be significantly higher than they currently are
