Guide to the recreational boat, yacht & Superyacht industries + 3Q23 Earnings $NFE $STKS $GOGO
After covering the industry for >2 years, we publish a guide addressed to investors to gain a full understanding of the industry and the current moment
This week, coinciding with the quarterly results of almost the entire sector, we took the opportunity to share our Guide to the recreational boat, yacht & superyacht industries. We believe there is nothing similar on the internet applied to publicly traded companies. We also analysed the results of other companies that we follow but are not related to the superyacht industry
1) Analysis of the results
One Group Hospitality
New Fortress Energy
Forza X1 (Recreational boat manufacturer but, as it is not yet in production, we did not include its analysis in our guide to the industry)
2) Guide to the Recreational boats, Yachts & Superyachts industry
We explain from scratch its main players (manufacturers, dealers, brokers), the role of each and the important details / differences to take into account when analysing them. We also carry out an objective analysis of the situation - updated post 3Q23 results - (The Italian Sea Group, Sanlorenzo, Ferretti, Beneteau, Catana, Marine Products, Brunswick, Malibu, Onewater Marine, Marine Max, Mastercraft Boats & Twin Vee) - Fountaine Pajot is included but not detailed.
One Group Hospitality
Brief introduction to The One Group Hospitality
The One Group Hospitality, one of the clear winners during the pandemic in 2020 and 2021, has had a couple of terrible years and has seen a decline of over 75% since November 2021. During this period, they have increased their number of self-owned restaurants by 20% (including Steakhouse and Kona Grill), but rising COGS has significantly decreased their operating profit (from $19.38 million in 2021 to a guidance of $14 million in 2023 - which, according to our estimates, will be around $10 million).
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Revenues increased by 5.3% year-over-year ($76.88 million compared to $73.02 million), despite this traditionally being the worst quarter of the year. This growth is mainly due to the opening of four new restaurants in the last 12 months. However, sales were expected to be around $83 million, and the sales of SKS, which is the driving force behind the group, were particularly disappointing.
Kona Grill continues to operate at a loss despite increased sales and efforts to make its kitchen operations more efficient through renovations.
At the corporate level, there has been a percentage increase in SG&A expenses, primarily due to lower sales, but the actual increase is limited. COGS has remained relatively stable, helped by lower utility costs compared to 2022. The biggest impact is seen in labour and related expenses as a percentage of sales. All of these factors have significantly deteriorated the EBITDA margin. It's true that historically this is the weakest quarter, and operating leverage can work both ways, but if sales in STKs do not improve and Kona Grill continues to incur losses, there is a risk of encountering more significant problems (although, for now, the $70 million in debt is manageable).
One Group Hospitality revised its guidance downwards (again). The main impact is on operating income which has decreased from $22MM to $14MM, representing a 36.5% decrease (and they have only achieved $4.37MM so far, so they are pretty optimistic with 4Q23)
Additionally, the Capex per restaurant has increased from an average of $3.25 million to $4 million - as we previously discussed in our thesis of One Group Hospitality - It's worth noting that they have confirmed the opening of two new STKS restaurants before the end of the year.
Plan going forward
The fourth quarter, as evident in the previous table, is by far the best of the year. In the coming week, they will be launching their seasonal menus and engaging in digital marketing activities. The key here will be to closely monitor the margins because, as seen in the analysis of other restaurants in the industry, promotions can boost revenues, but it's crucial to examine margins to determine if they are effective.
Additionally, they have implemented further price increases, around 3-4%, in both brands.
They plan to open two new STK restaurants before the end of the year, bringing the total to 8 new openings in 2023. In the early part of the following year, they plan to open two STK-owned restaurants and one licensed location. While in previous presentations, they mentioned that there were two Kona Grill restaurants under construction, this CC did not provide any updates on them. It seems like they are focusing on making these new locations profitable before continuing with further openings, which appears to be a prudent decision.
The buyback program has been completed, with them repurchasing 7% of the company's shares (31.5 million shares currently in circulation). It is understood that they will now take a pause to finish opening the new restaurants and assess the level of profitability in this fourth quarter of 2023.
At this point, it's evident that this year's numbers are going to be poor. However, for companies in the restaurant industry facing such challenges (a 70% loss of market capitalisation over the last two years), the critical questions revolve around how long they can endure high interest rates (which affect the entire industry and make it less attractive compared to other investments) and whether there are underlying issues that might derail the project (such as excessive growth, erratic economics, etc.) before consumer purchasing power improves.
The pace of expansion and the labour costs during the pre-opening months are negatively impacting short-term profitability. It's essential to consider that they are opening 10 restaurants in 14 months, which means an increase of over 35% in their owned locations (those contributing to 95% of the revenues).
In our view, the success of One Group Hospitality's turnaround will depend on their ability to manage the pace of expansion (it doesn't make sense to open 10 new STK restaurants with the associated pre-opening costs and Capex before improving the per-restaurant profit of the current locations). It's also crucial for them to improve sales, given that operating leverage plays a crucial role in this industry.
We believe that the company is undervalued (as detailed in the model shared on our thesis published a few weeks ago), but the prevailing market sentiment is quite negative. It should change influenced by the pace of restaurant openings over the next four months (leading up to the publication of the FY23 results) and, primarily, by the results of the last quarter of the year.
New Fortress Energy
Revenue $514MM, AEBITDA: $208 MM, Net Income: $62 MM. Worse figures than last year but all revenues were produced entirely from downstream assets. And for us, this has a capital importance as it ensures stability for the coming years. Notably, in 2022, the remarkable figures, as outlined in our analysis, originated from trading TTF-HH cargo.
In term of development, we think we are at the gates of a turning point for NFE as Brazil and Altamira are coming online in less than 3 months (Both terminals, Barcarena and Santa Catarina).
Energos Celsius progressing on schedule for the FRSU conversion, with an anticipated completion in Barcarena by December 2023, supported by the Norsk Hydro 30 TBU agreement.
FRSU has been secured for the Santa Catarina terminal, set to commence operations in January 2024 through a sublease arrangement with Petrobras and subsequently with Energos, ensuring continuity with the same vessel.
Altamira FLNG is poised for commissioning in December 2023, with the resolution of Department of Energy DOE issues.
Additionally, a significant milestone includes the deployment of over 200MW in Puerto Rico (in addition of the 150MW in June).
Financially, funding for the Barcarena plant (remember, there is a 605MW porwer plant and the terminal) has been secured, amounting to $575 million in asset-based financing, with construction currently at 37% completion and an expected finish in 3Q25 under a 25-year PPA.
Notably, around $1 billion in asset sales are anticipated in the next 12-24 months, aligning with NFE's deleveraging and investment-grade pursuit, reflecting the company's inherent DNA (selling any stable cash flow generating asset in exchange for more growth).
Also, Zero Parks makes a reappearance after a two-year hiatus, with three of them expected to generate $150 million in EBITDA from 2025. Honestly, we expect them to sell before 2025.
- You can find all details, updated as of 3Q23 in our New Fortress Investment Thesis
Gogo 3Q23 results came weaker than expected with revenues equal to $97.9 million, down by 7% mainly due to the delay in the launch of the Gogo 5G initiative to mid-2024 and the destocking of inventory. However, due to this delay, some costs have been shifted to 2024 and thus the marginality has improved.
Supply chain issues and labor shortages persist for OEMs collaborating with Gogo which is extending the time aircraft is kept for maintenance. We are also regarding a more normalized inventory situation in the dealers and OEMs, due to this destocking thus reducing the equipment revenue by -39% vs Q3 2022.
For 2023, Gogo has reviewed its outlook for revenues from $410-420 to $400-410 but has raised its EBITDA ($150-160 MM) and free cash flow ($60-$70 MM) to the high end of the already announced ranges, again due to the partial shift of 5G investment to 2024. In order to reflect all the changes due to the 5G delay, we have updated the model in the thesis available on our web.
We do not expect the growth to reaccelerate until the second half of 2024 when the launch of Gogo 5G and Galileo will be completed. The thesis remains unchanged as service revenues follow their pace and the initiatives seem to keep the impact that we had assumed and the market is still largely unpenetrated with 78% of the world’s business aircraft without a broadband solution, according to management figures.
Forza reported its first revenues in history this quarter, amounting to $18,000. The company currently holds $15.3 MM in Cash & Equivalents, including $9.89 MM in corporate bonds acquired this quarter (which we believe it is a smart way of taking advantage of both their situation & macro environment). These investments generated over $200,000 in financial income during the quarter, reducing the incurred a loss to $1 MM this quarter.
Forza has initiated the construction of its facility, with an estimated cost of $8 MM, and the first phase is expected to be operational in 10 months. This initial phase will enable the production of approximately 500 yachts per year. Presently, the company is manufacturing one boat per month, with ongoing tests and improvements until 1Q24 when they plan to commence the commercialisation of the order for 100 boats from OneWater Marine, anticipating an estimated revenue of $12 MM.
We took this opportunity to update the model with information discussed in the Conference Call and exchanged emails with them.
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Guide to the Yacht & SuperYacht industry
The yacht and superyacht industry is relatively recent in the stock market, with the majority of companies incorporating in the last three years, partly due to the COVID-19 boom. However, these companies have been in the industry for many more years.
Three key players should be distinguished:
Manufacturers: They are the builders of the boats, primarily divided by length. For smaller yachts (<20m), the distinction between monohull and multihull is also important (a newer market that is growing rapidly).
Small yachts / recreational boats (American companies): Malibu, Brunswick, Mastercraft Boat, Twin Vee, Forza X1
Medium yachts, French companies: Fountaine Pajot, Beneteau, Catana Group
Large yachts: Ferretti, Sanlorenzo
Ultra-large yachts: The Italian Sea Group
Dealers: They focus on marketing the product (yachts) and often diversify by also selling accessories and parts (repairs) to mitigate cyclicality. To varying degrees, they own Real Estate (marinas) where they sell boats.
OneWater Marine, Marine Max
Brokers: These individuals maintain a client portfolio globally, playing a crucial role, especially for larger yachts. Manufacturers often have a strategic relationship with brokers to connect them with clients. Brokers also represent clients throughout the design and construction process, acting as managers during the yacht's lifespan by scheduling inspections, etc. Their average commission is around 3% of the yacht's price. Some important brokers include Burgess, Northrop & Johnson, Fraser, IYC, Moran Yacht & Ships, RJC Yacht & Ships.