Sanlorenzo $SL.MI investment thesis + Earnings thoughts $VET $GTIM $ONEW $YACHT.MI Intred... + Monthly portfolio update
Sanlorenzo $SL.MI investment thesis + Earnings thoughts $VET $GTIM $ONEW $YACHT.MI Intred... + Monthly portfolio update
Monday 7th August 2023
Today, we are analyzing the situation of several companies that have reported results this past week (Good Times Restaurants, Ferretti, Intred,..) and publishing our monthly portfolio and watchlist update.
Additionally, we are sharing (no paywall) the results and thesis we conducted for Sanlorenzo, a company we have been discussing extensively in recent months as a peer of The Italian Sea Group.
Next week, we will share an interesting microcap company plus analysis of Golar LNG, Gogo, New Fortress Energy... 2Q23 results
As always, if you want to get in touch with us, we are available at info@moram.eu
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Sanlorenzo $SL.MI 2Q23 Results
The results presented today by SanLorenzo $SL.MI have been very positive with a beat on the top-line and EBITDA, a significant rise in the guidance, and some positive notes on the outlook for the next two/three years.
The net revenues from new yachts have climbed 12.6% yoy. We want to highlight the strong momentum for the Superyacht division (+36%). Europe and MEA have remained very strong and have helped overcome the decrease in the Americas due to the increase in the interest rates (as commented in Q1, most of the customers in the US use credit to finance the purchase) and in APAC due to the ongoing due diligence on the acquisition of Simpson Marine. The consolidation will take place in 2024, so no effect is expected for this year.
EBITDA and the net profit (despite the highest effective rate) have increased both at 20.3%. The EBITDA margin hit 17.4%, +110 bps versus the same period last year. There has been an increase in profitability for all the segments with an even more positive
The backlog is flat compared to last year. This was already expected from the normalization of the backlog entry in the previous quarters. However, the CEO has also commented on the strength of the demand in July, at the same level as in 2022. The management has commented that to achieve 2024 guidance they would “only” need €250 million in backlog entry during H2 (€388.4 million in H1 which is usually softer). The demand remains very high with an increasing waitlist. For example, they don´t have more deliveries available for yachts over 30mt for Summer 2024 and they have orders of Superyachts until 2027.
The net financial position is now €140.5 million vs €100.3 at the beginning of the year. Although it is a bit by the working capital movement during the first six months of the year. Despite this, it continues to be amazing the capacity of the Italian company to convert EBITDA into cash flow (almost 100%) and they have achieved the NFP target of the year in just six months.
They have also significantly increased the guidance in all the metrics. They now expect:
89% of 2023 mid-point guidance is covered by the current backlog, which means they will for sure hit it (in the worst-case scenario in the low-end). And more taking into account the positive start of Q3.
Apart from the positive results, we want to highlight also the positive tone of the call and the confidence in reaching the 2025 guidance presented in the CMD. As we have been commenting on our last posts, we are pretty confident about the beat SanLorenzo and TISG will do in their guidance in revenues but especially in EBITDA margin. With the results presented by Ferretti and SanLorenzo this week, we face with even more confidence the quarterly results of $TISG (7th September) and the mid-term outlook for the sector in which the penetration rate continues to be lower than the last years average.
Sanlorenzo Investment thesis - 15th January 2023
Note: we exceed Substack length limit, all images are incorporated on the original thesis: https://moram.eu/sanlorenzo/ (and not in here)
Thesis in a nutshell
SanLorenzo ( $SL.MI ) is an Italian company dedicated to the designing and manufacturing of custom-made luxury yachts. SanLorenzo is specialized in the segment of 30-40 meters in length in which they have been the global leaders during the last decade. SL has been expanding its range of yachts continuously, competing in the yachts segment over 40 meters (the most lucrative one).
Since the IPO in 2019, SL has delivered impressive growth with improving margins favored by the tailwinds of the strength of the sector which up to this moment has not been affected by the possible recession. On top of that, the company has great revenue visibility for the following years thanks to its massive backlog. SanLorenzo capacity is fully booked until 2027.
SanLorenzo is an owner-operator company led by the CEO with more than 60% of the shares, a repurchasing program in progress, and the perspective of increasing sales by a large double-digit with a further expansion on margins and diversification of revenue streams.
On 30th September, with a net cash position of 91.9 million with a gross backlog of 1,651 million, it is well positioned to capture the booming moment of the yacht industry. Currently, their market capitalization is around 1,300 million euros.
Sanlorenzo History
SanLorenzo started its operations in 1958 manufacturing high-end motor yachts in La Spezia. Since its beginnings, the company has built only a limited number of made-to-measure and fully customized yachts per year for sophisticated clients.
In 2005, Massimo Perotti, the CEO, Chairman, and maximum shareholder with 60.82% of shares, acquired San Lorenzo and took the company to another level. Since he took charge, the company has continuously grown and invested in the development of new yacht lines (SD, SX, SP) and segments (superyachts (+40 mt yachts) and sportive yachts (Bluegame)).
In 2007, they inaugurated a second office in Viareggio, starting the production of superyachts. Nine years later, a new office was opened in La Spezia dedicated to the production of metal superyachts. During the great financial crisis, the company showed the strength of its business model, maintaining the revenues in a context in which many of its competitors were forced to shut down.
This is even more impressive if we talk about the magnitude of the financial crisis for the sector, in which the sales of nautical products dropped from 6.2 billion euros in 2008 to 250,000 million in 2014, a 94% decrease.
In December 2019, in the context of the high demand for luxury yachts and with many opportunities ahead, the company went public. With this funding, the company has invested in:
Increasing their operating capacity.
Acquiring companies to ensure the highest quality in their value chain.
Increase the portfolio of yachts, with a focus on increasing the length of the yachts and sustainability.
Since Mr. Perotti acquired the company, the evolution of the top line was fantastic, compounding at a 17.9% CAGR between 2004 and 2021, with accelerated growth during the last years derived from the strength of the luxury yacht segment.
Sanlorenzo Business Model
SanLorenzo is an Italian shipyard dedicated to the design and production of customized high-end yachts. Due to the nature of the company, around 70 yachts will be delivered in 2022, this number has increased from 32 in 2017 and will continue to increase thanks to the CAPEX investment during the last years.
They are the global leaders in the 30-40 meters yachts, which constitute their main revenue contributor, with a market share of around 18% for yachts of this length. Moreover, they have two other divisions that expand their range upwards and down in length (Superyacht and Bluegame). The portfolio of the three segments has been expanded to satisfy different needs and to adapt to market trends.
When selling the yachts, the company sells directly (90% of sales) and through brokers (10%) which means a low percentage compared to some competitors like Benetti is sold through dealers. Even if this supposes a bigger effort by the company, they are comfortable with this and according to the US experience (we will develop this point later), they will continue with this sales strategy.
An important remark of the business model is the flexibility in the cost structure; with 2,600 people working on the activities of the group, only 580 are directly employed by SanLorenzo. Although most of the steps in the value chain that involves quality are internally produced and the company has a clear route to being more vertically integrated through partnerships and minority equity investments, there is also a part that relies on suppliers. In fact, the company counts 1,500 suppliers.
Due to the nature of the company, SL has very efficient working capital management, with a structural negative Net Working Capital. This is thanks to the advanced payments realized by the customers as the shipyard reaches the agreed milestones, the limited inventories, and the power SL has to establish the terms of payment on their suppliers. This management efficiency provoked great cash-flow generation during the last years, especially in 2022.
To manage the increase in the price of raw materials, the company has a clause by which they can ask customers for an increase in price after 2023 if inflation is higher than expected, the customer has the chance to cancel the contract. Up to this moment, the company has perfectly managed this situation, transferring the increase in prices plus a margin to their clients which is translated into higher margins. Moreover, they have a fixed contract with their main supplier for the next three/ four years, so the inflation in the inputs is being well resolved.
Business lines and geography
Due to the increase in the LOA of their yachts and the great market demand, the company is increasing its visibility for the next years, making it even more resilient to turndowns. As explained since the IPO, SanLorenzo has a clear strategy to enlarge the average boat length and develop the APAC and Americas markets where they anticipate the increase in the number of UHNWI will concentrate. As TISG, they have also detected the will of clients for larger boats.
In more detail, the divisions of the company are the following:
Yachts
The flagship division of the group and the most developed segment as it covers a great diversity of yachts. The length of these yachts goes from 24 to 40 meters.
SL Range: The range includes six models (SL78, SL86, SL90A, SL96A, SL106A, SL120A) with lengths from 24 to 38 meters. It´s the historical range of SanLorenzo.
SD Range: SD90, SD96, SD118 and SD126. The series offers models in composite material from 28 to 38 meters in length. Launched in 2007.
SX Range: SX76, SX88, and SX112. SX line is a revolutionary project that covers a new and transversal market segment. It´s between the SL and SD lines. Launched in 2017.
SP Range: It is the newest division and is focused on efficient consumption. It was launched in 2022.
Asymmetric models of the SL and SD lines are the segment’s main drivers of revenue growth within the Yacht segment.
Superyachts
We talk about Superyachts for boats over 40 meters. They are fully made to measure. 2021 was their best year in this division, delivering seven superyachts. At the beginning of the year, they had 23 of these vessels under construction (assuming six deliveries per year, they have filled out all the orders until 2026. This information comes also from management discussion).
Alloy Range: Alloy. It includes a 44 meters yacht fully in aluminum. Launched in 2007.
Steel Range: 52Steel, 57Steel, 64Steel, 68/73Steel. Most of the sales of superyachts come from this range which has a length between 52 and 72 meters. Launched in 2010
Explorer Range: 500Exp. 47 meters. Launched in 2015
X-Space: X-Space will be launched in 2023 (495GT). They have already signed six contracts for this line. It is a “small” superyacht.
Bluegame
This is the newest division and the one focused on smaller yachts. This segment is the only one not sold under the SanLorenzo brand. The growth of the division has been exponential.
BG 2018, 42-72 feet (13-22 m). Most affordable and smallest boat. It includes walk-around yachts.
BGX 2019, 60-70 feet (18-21m). Introduced in 2019. It includes two models (BGX60 and BGX 70). It takes the SX range of Yachts to a smaller scale.
BGM 2023, 75 feet. It will be launched next year and already has one sale.
Here, we see one of the main drawbacks of the thesis. We believe that larger yachts mean larger margins. Although it´s true that the superyachts are each time larger and that the Net Revenues from new yachts in 2019 were 150M and for the nine months of 2022 are 138M, which means a surely increase for the year-end, this increase is not as great as in the other divisions. One of the company's objectives is to strengthen this division, but they are sold out until 2026/2027. So, we will have to look carefully at the evolution of sales.
We guess that Superyachts do not account for a larger share of revenues for the lack of operating capacity. They are making a considerable investment to increase the operating capacity during the last quarters. We will follow how these acquisitions are integrated and the rapidness with which they can start their operations, and what they mean in terms of manufacturing capacity for Superyachts.
The company targets a sales distribution of around 50% in Europe and the rest shared by the Americas and APAC, plus some residual from MEA.
By regions, the % sales of SanLorenzo were (website Moram)
The main highlight of the table is the large increase in the Americas. This is mainly driven by the opening of a direct distributor in this area and the highest growth in the number of UNHWI in the Americas.
Apart from the Americas market, SanLorenzo is focused on developing and exploiting the APAC market. One target for this region is to make the Bluegame division stronger in which they see a big potential. Therefore, it is probable to see them establish a direct seller as they did with the US. When we talk about APAC, we are referring mainly to Hong Kong because in mainland China there is a 50% tax on luxury products, and 0% in HK.
Facilities
Production activities are carried out at four shipyards within about 50 kilometers radius at the heart of the Italian nautical sector which ensures qualified personnel and facilitates good operation through the value chain between the different facilities:
Dedicated to the outfitting of yachts of less than 100 feet(≈30 meters) in the Yacht and Bluegame division.
La Spezia. This facility is dedicated to the outfitting of superyachts.
Development of new models and production of semi-finished products for outfitting the Yacht division.
Used to outfit larger Yachts +100 feet and some superyachts
Strategy
According to management discussion and the diverse conferences and presentations, to cement future solid growth, the company has developed a plan that we can sum up in the next points:
Increase the production capacity. During the IPO process, the CEO targeted an increase in revenues by around 8-9% per year. But reality has been much more favorable and to face this expansion, the company needs further production capacity. As an example of this point, they have added over 10,000 sqm of production areas during Q2-Q3 and in Q4 there have been further acquisitions. According to the management, 2023’s budget can be covered with 90% of the production capacity, which does not offer a lot of margin for further revenue growth.
Focus on the higher length of yachts and portfolio expansion. As we have already commented, SanLorenzo as well as other competitors have observed a strong increase in the demand for yachts of larger lengths. A big proof of it is that they have already sold out all the superyachts until 2026/2027. There is still a price gap to Nordic builders in superyachts in terms of euros paid per gross tonnage that SL is closing. The increase in the average length would improve the margin contribution and ensure a higher coverage of the backlog. Nevertheless, they are not accomplishing it. According to the information retrieved from articles Boat International Global Order Book, the average length in meters of the yachts was 35,9 in 2020 and 35,8 in 2022. Again, they have been investing to have the operating capacity to house the production of superyachts.
Develop SanLorenzo services. What they call Timeless should give them a more recurrent revenue stream with higher margins. By now, we don´t know much about the strategy to follow and the financial impact it will have.
SanLorenzo academy was launched in 2018 to ensure the quality and quantity of personnel. (80-100 target graduates per year)
Timeless: Refit, restyle, and lifetime care.
Leasing/ Financing
Charter fleet program: SL wants to establish the first single-brand charter program in the yachting sector. This is a fleet to rent, usually per week. As the company has commented to us, it will be a fee-based business in which SanLorenzo will act as an intermediary between SanLorenzo yacht owners willing to rent out and people willing to rent them. Financial targets will be disclosed on 14th What we like about this program is that it does not use production capacity does not involve inventory risk and can earn good margins. At the end of 2022, they acquired Equinox, a company specialised in chartering services.
Sustainability: According to the management, it will be one of the central points in SanLorenzo’s strategy for 2030 together with technology development. It is developing innovative sustainable solutions with Siemens for the generation of electricity on board a 50-meter Superyacht and with Rolls-Royce to combine this onboard electricity generation with methanol also in the Superyacht division.
Develop Americas and APAC. Americas and APAC will be in the near future the geographic areas with more UHNWI and thus, with more sales potential for the company. They have already attacked the Americas market with a subsidiary and the result has been a 30.4% increase in sales in the first nine months of 2022 in comparison to the same period in 2021. APAC is well positioned to be a main location of the yacht sector due to the large coastline and the higher rate of growth of these economies. During the next few months, the company will open a direct distributor in APAC.
We will be closely following the next It will conference on 14th March, where they will disclose the business plan for the next years (23-25). Here, we would like to know more about the economics of the Charter program, the plan for the expansion of the operating capacity, and how this relates to the Superyacht division. It would be also interesting to know the plan for the refit division.
Sector & competitors
The evolution of the industry and thus of SanLorenzo is closely tied to the variation in the number of UHNWI (net wealth above USD 50 million) and the rate of UHNWI that own a luxury yacht (penetration rate).
UHNWI Evolution
During the last decade, the number of UHWNI has sharply increased from 98,700 in 2012 to 264,200 in 2021 (Boat International). Right now, there is a penetration rate of around 4,5%.
According to the Credit Suisse Global Wealth Report 2022, it is expected an average annual increase of around 24,000 new UHNWI per year (2021-2026). Thus, there will be around 385,000 UHNWI for 2026.
If we focus on UHNWI, the projections of the Credit Suisse Global Wealth report, the data is the following:
Visually, we can observe how North America will continue to be the clear land where more UHNWI exists, with the sharp increase of China, which will surpass Europe.
Penetration rate
The penetration of the yacht industry is only of approx. 4,5%. After covid, this rate has increased by a percentage point. This is a big increment, although there is still room for a further increase as we believe that the trend of demanding more peaceful and relaxed holidays will persist on time even after the post-covid effect.
According to some managements such as Azimut-Benetti, TISG, or SL, UHNWI are looking for the privacy, tranquillity, and security of being able to spend a relaxing time without worries. This is bringing so much demand from first-time buyers. However, it is a challenge for the sector to maintain the level of attraction and take care of new clients.
In this new generation of customers, we see younger clients demanding sustainable yachts with the same demand for exclusiveness and uniqueness. Each time the decision to buy a yacht relies more on a family in contrast with a one-man decision that was more common in the past.
Competitors
In the luxury yacht industry, most of the players develop their operations on a worldwide basis. Thus, some of the competitors of SanLorenzo are the following:
For 2022, 1,203 yachts were in production, this is a 17.5% increase compared to the 1,024 projects in 2021.
During the period between 2012 and 2018, the number of shipyards delivering superyachts declined from 107 to 59 (-45%). The shut down in shipyards was even more accused in the US. This is another reason why all the analyzed competitors see big opportunities here.
In the superyacht segment, there is an increasing concentration in the number of shipyards that can build a yacht of this measure. We consider that this market trend will continue due to the barriers to entry of the industry and the probable disappearance of the weaker shipyards unable to manufacture at the needed scale.
For +55 meters there is a very limited offer and a very high demand for UHNWI. So, if SL can strengthen this division, we could see further increases in prices and thus in margins. According to TISG management, demand is 3x the production capacity.
Some trends to mention in the luxury yacht industry are the following:
According to BOAT International, “there is a growing domination of semi-custom yachts, which are getting bigger all the time, as well as the record low number of ´spec´ projects (manufacturing a yacht without having a customer but with the expectation of finding one when work is completed). It speaks to an impatient superyacht client base that wants boats as soon as possible”.
We see that checking also at the information provided by competitors like TISG and Azimut-Benetti. The three companies have plans to expand their operating capacity and integrate vertically the value chain.
The luxury yachting sector suffered a strong crisis in 2008 after a booming expansion in the previous years. We could be facing the same scenario nowadays. If this occurred, SL is well positioned to surpass it thanks to the sound backlog and balance sheet. It could also open the opportunity to acquire other businesses.
Structurally, the industry has high entry barriers due to the high investment necessary to start operations and the great operational scale needed to make it profitable, the difficulty to own operating capacity, and the knowledge and trust needed from high-wealth clients to make such a large buy.
There is an increase in the price paid by customers per gross tonnage (GT). In 2019, in Italy, that amount averaged around EUR30,000 to EUR34,000 GT for an average shipyard. Sanlorenzo was already around EUR40,000 per GT. The best Dutch and Germans shipyard went around EUR54,000 to EUR56,000 per GT. We do not have exact numbers for 2022 but we are sure there has been an increase and we think SanLorenzo could have signed contracts at around 45,000-47,000 euros per GT for the next years, closing the gap with its competitors.
Management Team
SanLorenzo’s management outstands by its experience. We would like to focus on Massimo Perotti (62 years old) who is the CEO and maximum shareholder (with 60.88% of the shares).
Since he was 24, he has been linked to the yacht industry, working for Azimut Benetti. At the age of 27, he was appointed executive. In the early 1990s, he joined the board of directors and in 1996 he became the CEO of the main Azimut division. The total remuneration for 2021 was 1.8 million.
Capital allocation
For 2023 and 2024, it is expected a Capex of around € 50M, which will be around 6% of the revenue. So, there will be a great free cash flow conversion. On top of that, the balance sheet position is very solid. That is why it is important to see where the company will allocate these funds. From this 50M, if market conditions do not change, we estimate around € 35M to enlarge the operating capacity, in line with the previous years.
They have already mentioned that M&A is not a priority although they are open to opportunities that they can easily access with their great financial position and access to liquidity.
During the last months, they have been repurchasing shares, totaling a 0.35% of the total shares. We can not expect much more due to the reduced free float. We also expect a large increase in dividends for the next year.
Sanlorenzo Valuation
We have used two different approach to value SanLorenzo. Here we present the comparable approach and next 27th January we will include the DCF. We proceed this way as we analysed SanLorenzo to test our investment thesis (and position in the portfolio) in The Italian Sea Group.
As we see, the ratio of Gross Backlog / Revenue increased in 2021 for SanLorenzo, and presumably, it will maintain for 2022. This can mean either that the average length has increased or that the number of yachts in the pipeline has increased, in both cases, it is great news as it improves visibility.
This number is smaller compared to TISG because the average length of SL yachts is 35,8 mt and 54,7 mt for TISG. We are not worried about the decrease in the TISG ratio as revenues include the selling of Lamborghini 63 which has a payment schedule that does not translate into a big increase in backlog, a 25% Downpayment. That is why the percentage of revenue in TISG is always higher than the percentage of backlog.Both have had superior growth compared to the industry but due to the lower scale of TISG, the company led by Mr. Constantino has grown at an even higher rate. We can also observe a huge expansión of the EBITDA margin (note that super yacht represent a considerable higher percentage of the TISG's backlog over the SL one). As we explain in the conclusion, we think that both companies will continue with this growth in the margin but TISG will have a higher expansion.
Risks
Country risk: Despite the international operations of the company, the fact of being under Italian legislation is a risk due to the instability of Italian politics
Operating capacity: Specifically in the super yacht segment. Right now, they can cover 2023 with 90% of their capacity. So, assuming a further increase in sales, they need to increase their operating capacity. They are mitigating this risk acquiring facilities close to its shipyards to be able to growth in this segment.
Adaptation of newly acquired facilities and organization. With the huge experience of the management, this shouldn´t be a problem.
We think that the company is well positioned to face a recession due to:
a) UHNWI are not as sensitive as the rest of the world to recession. Moreover, the current demand is much higher than the production capacity of the shipyards.
b) Flexible cost base and a wide range of suppliers
c) Great backlog which allows visibility for the next years and limited risk as yachts are produced as offers come in
Conclusion about Sanlorenzo
We can conclude that the company analyzed is a high-quality business in which we can be calmed in terms of revenues and margins in case of a recession thanks to the impressive backlog, the flexibility in the model, and the sound balance sheet position.
In the following months, we would like to see a use of cash (apart from the high increase in dividend we expect) to take profit from this market situation, an increase in the weight of Superyachts in the revenue mix, and further development of the service line that can contribute in a more recurrent way.
Despite this, we consider at the current prices The Italian Sea Group represents a bigger market opportunity for the following reasons:
We think that thanks to the larger yacht production and the recurring revenues from Refit, TISG will have higher resilience to a recession.
SL market cap is 4x TISG. When SL made 300 million in sales the EBITDA margin was way tighter than TISG´s. Once they benefit from larger economies of scale and thanks to the point abovementioned, we think TISG could close the gap in the EBITDA margin (15,5 vs 17,6 expected in 2022).
The valuation is less demanding. EV/EBITDA for 2022 is 7,6 for TISG and 9,2 for SL.
Following the comparison with TISG, from SL we appreciate the larger track record from management and the great net cash position of the company led by Mr. Perotti. Although it is worth mentioning that the net debt position for TISG is due to the Perini Navi acquisition (which has been transformational for TISG, and we suspect that SL could not get due to the commented reduce space within its facilities to build large megayachts as it has TISG).
With all, we will continue to look closely at this company and take the chance in case the company trades at a valuation with more margin of safety.