VEEM Ltd

Established Player in Marine Technology Products: VEEM Ltd (ASX: VEE) is engaged in the business of marine technology primarily focusing on propulsion and stabilisation systems. Its products are used for the global luxury motor yacht, fast ferry, commercial workboat and defence industries.The company also manufactures bespoke manufactured products and services to the marine, defence and mining industries. The company’s head office is in Perth, Western Australia and operates from a 10,500sqm purpose-built fabrication and manufacturing facility with its in-house skilled R&D team. VEEM made its debut on the Australian stock exchange in 2016.

Recently, the company reported PAT of $2,756,918in FY18 as compared to $3,848,750 in FY17, recording a decline of ~28.4%. The decreased profits in FY18 can be attributed to delay in some defence contracts and lower inventory of Gyro products as VEEM was waiting for orders of such products. The revenues for the business came in at $40,712,292 in FY18 as compared to $ 38,082,604 in FY17, posting a growth of 6.9%. The net operating cash flows reported a shortage of $1.4 million resulted by the continued build-up of Gyro inventory in FY18 with total inventories at $13.3 million from $8.4 million in 2017.

First half of FY19 continued to be slow with meagre sales growth of 1.98% (pcp) to $20.38 million. Net profits were down by 58.81% to $0.67 million in 1H FY19, majorly impacted by higher marketing, advertising and travel costs at ~$0.99 million. The management expects its marketing costs to see some relief and in turn an increase in sales across all the aspects of the business with a strong pipeline for 2H FY19. Further, the Board of Directors declared a fully franked interim dividend of $0.0015 per share with the payment date of April 26, 2019 and record date of March 8, 2019. Moreover, the company received an order to deliver its first largest gyro order -the VG1000SD during 1H FY19. Delivery of this product will take place in late 2019.

Financial Snapshot (Source: Company Reports)

What to Expect from VEE: The company intends to become a global leader in engineering products. Being in a capital-intensive industry, short-term profitability might see some hiccups while long-term prospect seems bright and will be visible in future top-line and bottom-line.A new gyro assembly hall had been commissioned on a new leased site in Canning Vale to enable production cell assembly program to be established for gyros.

Stock Recommendation: At CMP of $0.550 per share, the stock is trading at price to earnings multiple of 40.290x with market capitalization at ~$72.8 million. Analysing the price movement, the stock has appreciated 31.76% in last 1-year whereas it is up 12% in last 3-months. It equates that the company generated decent returns over the said period which might correct in the near term as it is trading close to its 52-week higher level of $0.645. On the other hand, comparing the company with its peer group, net margins for VEEM stood at 3.3% in 1HFY19 is quite lower than the industry median of 6.7%. On the same line, RoE for the company stood at 2.2% which is well below the industry median of 9%.

Considering the capital-intensive business, margins might see an improvement in the long-run. Based on the mix scenario, we have a watch stance on the stock at the current market price of $0.550 (down 1.786% on 16 April 2019).
 

Aveo Group

Sluggishness Persists in Residential Property Markets:Aveo Group (ASX: AOG) is a leading owner, operator and manager of retirement communities in Australia.  The company in its earlier release updated about the development status of various projects.

Under Major Development, 80 units has been delivered in 1H FY19 and 339 units to be delivered in 2H FY19.Under Minor Development, 32 units were delivered in 1H FY19 and 93 units to be delivered in the next half of FY19.


Development Project Update (Source: Company Reports)

Financial Performance in 1H FY19: The underlying PAT came in at $12.0 million in 1H FY19, down 67% (pcp). Whereas on a statutory basis, Aveo posted a loss after tax of $44.7 million in 1H FY19, down 130% (pcp), largely driven by a $63.2 million decrease in the valuation of the Retirement property portfolio. While determining the value of the portfolio, lower property price growth was assumed. It replicated the downturn in the broader residential property market in Australia.  The decrease in value of Retirement property portfolio was the main driver for the decrease in Aveo’s net tangible assets per security from $3.92 as at June 2018 to $3.83 as at December 31, 2018.
 

Key Financial Outcomes for the First Half (Source: Company Reports)

What to Expect: Themanagement is focused to strengthen its position in the retirement living market of Australia.AOG is likely to deliver Major Development units which were targeted at 419 in FY19. The company reaffirms its target full year distribution based on 40% - 60% of the underlying profit.

Stock Recommendation: At CMP of $1.910 per share, the stock is trading at price multiple of 6.560x with an annual dividend yield at 4.65% and market capitalisation at ~$1.12 billion. Looking at the price performance, the stock has given a negative return of 28.33% in last 1-year whereas appreciated 22.47% on 3-months basis. Price to book ratio for the company stood at 0.5x which is below the Real Estate Operations’ Industry Median of 0.9x. However, EBITDA margin at 23.1% seems lower as compared to the industry median of 29.8%.

Based on the foregoing, we recommend a “Hold” rating on the stock at current market price of $1.910 per share. (down 1.292% on April 16, 2019).
 

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