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Sealegs Corporation — Update 11 July 2016

Sealegs Corporation — Update 11 July 2016

Sealegs Corporation

Analyst avatar placeholder

Written by

Sealegs Corporation

Refocused and delivering

Earnings adjustment

Industrial engineering

11 July 2016

Price

NZ$0.12

Market cap

NZ$16m

Net cash (NZ$m) at 31 March 2016

1.8

Shares in issue

134m

Free float

33.2%

Code

SLG

Primary exchange

NZX

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

8.1

33.3

62.2

Rel (local)

8.2

28.9

39.6

52-week high/low

NZ$0.13

NZ$0.06

Business description

Sealegs Corporation is a manufacturer of amphibious craft and amphibious enablement systems. It is based in Auckland, New Zealand, and sells its products worldwide.

Next events

AGM

September 2016

Analysts

Finola Burke

+61 (0)2 9258 1161

Moira Daw

+61 (0)2 9258 1161

Sealegs Corporation is a research client of Edison Investment Research Limited

Sealegs has demonstrated that its refocus on fitting its technology to original equipment manufacturer (OEM) hulls is working. The company reported a significant turnaround in operating performance in FY16, with normalised NPAT of NZ$589,000, its first profit in three years and well ahead of our forecast for NPAT of NZ$115,312. On a 12-month forward P/E of 157x, Sealegs is trading at a 16% discount to its peers.

Year end

Revenue (NZ$m)

PBT*
(NZ$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

03/15

17.3

(1.6)

(1.3)

0.0

N/A

N/A

03/16

18.6

0.6

0.4

0.0

30.0

N/A

03/17e

18.0

1.0

0.7

0.0

17.1

N/A

03/18e

19.8

1.8

1.3

0.0

9.2

N/A

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Significant operational turnaround

Sealegs delivered normalised NPAT of NZ$589,000 for the 12 months to 31 March, almost a NZ$2.3m turnaround on the previous year. Sales increased 7.1% to NZ$18.56m and gross profit margin expanded to 29% from 21% in FY15 as the company extracted more costs from its business and changed its product mix. Return on capital employed (ROCE) in the group increased to 10.9% in FY16 from -24.5% in FY15. The company’s’ product mix changed in FY16. Sealegs sold 84 Sealegs hulls in FY16, down from 100 a year before, but fitted 14 of its amphibious marine systems to OEM hulls and sold 13 of its Amphibious Enablement Kits.

Expanding its search and rescue presence

The company has experienced success with its push into the commercial search and rescue market, with the delivery of 13 craft to the Malaysian Special Operations Command and fire departments during FY16. Together with the strategic partnership Sealegs has forged with OEM manufacturer Asis in the United Arab Emirates, these sales will help underpin the company’s position in this market.

Valuation: Trading at a discount to peers

We value Sealegs at NZ$0.18/share (previously NZ$0.20/share) using a DCF methodology (WACC of 13.1%, terminal value of 2.0%). On a P/E basis, the company is trading at a 16% discount to its listed peer group of recreational and commercial boat manufacturers. Sealegs has delivered on its turnaround plans and is well positioned to continue to improve operating margins, and hence cash flows, over the next two years.

FY16 results and earnings adjustments

Sealegs delivered its first net profit in more than three years with normalised NPAT of NZ$589,000 for FY16. This compared with a net loss in FY15 of NZ$1.7m normalised for impairments and share-based transactions. Reported NPAT was NZ$551,000 compared with a reported net loss of $2.3m in the previous year. The result was underpinned by a shift in the product mix and a focus on costs. Sealegs took NZ$600,000 in operating costs, predominantly administrative, marketing and distribution expenses, out of the business in FY16, which equates to 11% of its cost base. Revenues grew by 7% y-o-y and gross profit increased 47.5% (see Exhibit 1 below).

Exhibit 1: Reported FY16 versus FY15

NZ$m

FY16

FY15

% change

Total revenue

18.56

17.33

7.1

Gross profit

5.30

3.59

47.5

EBITDA

1.03

(1.27)

(181.0)

EBIT

0.64

(1.67)

(138.0)

PBT

0.62

(1.62)

(138.5)

NPAT normalised

0.59

(1.68)

(135.1)

NPAT reported

0.55

(2.33)

(123.7)

EPS (c)

0.44

(1.31)

(133.6)

Source: Company data

Sealegs’ FY16 results significantly outperformed our forecasts, with reported gross profit 11% ahead of our expectations and normalised NPAT 4x our forecast for NZ$115,312 (see Exhibit 2).

Exhibit 2: Reported FY16 versus Edison’s forecast

NZ$m

FY16a

FY16 Edison

% difference

Total revenue

18.6

18.4

1

Gross profit

5.3

4.8

11

EBITDA

1.0

0.4

137

EBIT

0.6

0.1

629

PBT

0.6

0.2

264

NPAT normalised

0.6

0.1

410

EPS (c)

0.4

0.1

410

Source: Company data, Edison Investment Research

The improved results were in part due to the changing revenue mix in the company. Under CEO David McKee Wright’s stewardship, Sealegs has pursued strategic partnerships with OEM manufacturers to install Sealegs’ amphibious systems on their hulls. In FY16, 14 were fitted, compared with one in FY15. The company also sold 13 Amphibious Enablement Kits compared with eight the year before. While Sealegs continues to also make and sell craft, this change in strategy has improved the company’s operating margins. Exhibit 3 highlights the change in revenue mix from FY13 to FY16.

Exhibit 3: FY13 revenue mix

Exhibit 4: FY16 revenue mix

Source: Company data

Source: Company data

Exhibit 3: FY13 revenue mix

Source: Company data

Exhibit 4: FY16 revenue mix

Source: Company data

Earnings adjustments

We have adjusted our forecasts to reflect the cost reductions Sealegs extracted in FY16 and the change in product mix. We expect the company to continue to refine its cost base as more revenues are generated from OEM hull sales and OEM kits. This should lead to a more sales-based rather than manufacturing-based business. Our NPAT forecast for FY17 has been upgraded by 12% to NZ$0.9m, after applying the cost savings achieved in FY16 and an expectation that management will maintain a conservative costs focus. We have also changed the mix of revenues in FY17e and FY18e. Previously, we had forecast a more aggressive reduction of boat manufacturing in favour of OEM hulls and OEM kits. We anticipate that the company will continue to reduce the number of boats it builds, but at a slower pace. Exhibit 5 sets out the revised forecasts for production in FY17 and FY18.

Exhibit 5: Forecast changes to production

FY17e new

FY17e old

FY18e new

FY18e old

Boats

80

30

69

15

OEM Hulls

20

80

37

110

OEM Kits

15

15

16

30

Source: Edison Investment Research

The changes to our production forecasts have resulted in a reduction in our revenue forecasts for FY17e and FY18e, but the cost reductions extracted in FY16 are forecast to flow through to FY17e and FY18e, hence we have upgraded EPS respectively by 12% and 9%. Exhibit 6 sets out the changes in our forecasts.

Exhibit 6: Earnings adjustments

NZ$m

FY17 new

FY17 old

% change

FY18 new

FY18 old

% change

Total revenue

18.0

20.3

(11)

19.8

25.2

(22)

Gross profit

4.9

5.0

(2)

5.5

6.4

(14)

EBITDA

1.3

1.2

12

2.0

1.9

6

EBIT

0.9

0.8

13

1.7

1.6

9

PBT

1.0

0.9

9

1.8

1.6

7

NPAT

0.9

0.8

12

1.7

1.6

9

EPS (c)

0.7

0.6

12

1.3

1.2

9

Source: Edison Investment Research

Valuation

We use a DCF methodology to value Sealegs and arrive at NZ$0.18/share after applying a WACC of 13.1% (risk-free rate of 3.5%, equity risk premium of 7.0%, beta of 1.5) and terminal growth rate of 2.0% to our forecasts. We previously applied a WACC of 17.3% (risk-free rate of 5.0%, equity risk premium of 7.0%, beta of 2.0) to our valuation but, in light of the improved operational metrics of the company, the continued low interest rate environment and the improved profitability of Sealegs, we believe a lower WACC is justified. Exhibit 7 sets out our DCF valuation.

Exhibit 7: DCF valuation (NZ$m)

WACC (%)

13.1

Terminal growth rate (%)

2.0

PV of cash flows

11.1

Terminal value

10.5

Enterprise value

21.6

Plus net cash (at 31 March 2016)

1.8

Equity value

23.4

Equity value per share (NZ$)

0.18

Source: Edison Investment Research

Sealegs is trading at a moderate discount to its listed peer group of recreational and commercial boat manufacturers and products. As Exhibit 8 highlights, based on 12-month forward consensus estimates, Sealegs is trading at a 16% discount to the median P/E of its peers and a 2.5% discount on EV/revenue. On an EV/EBITDA basis, Sealegs is trading at a 25% premium to its peers. That said, we note the larger market caps of the majority of the peers.

Exhibit 8: Peer comparison on 12-month forward consensus estimates

Currency

Market cap
(m)

Enterprise
value (m)

EV/revenue
(x)

EV/EBITDA
(x)

P/E
(x)

Sealegs

NZ$

16.0

12.6

0.7

9.2

15.7

Beneteau

Euro

645.8

636.7

0.5

5.6

15.0

Brunswick Corp

US$

4329.4

4260.9

0.9

6.2

12.7

Garmin

US$

8199.3

6693.2

2.3

11.4

19.9

Marine Max

US$

482.7

482.7

0.5

8.3

22.7

Marine Products Corp

US$

336.9

359.6

1.5

12.4

17.7

West Marine

US$

209.0

209.0

0.3

6.1

20.5

Median

 

 

 

0.7

7.3

18.8

Source: Bloomberg, Edison Investment Research. Note: Prices as at 8 July 2016.

Exhibit 9: Financial summary

NZD'000s

2012

2013

2014

2015

2016

2017e

2018e

March

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

13,830

16,407

16,783

17,330

18,564

18,049

19,769

Cost of Sales

(10,360)

(11,576)

(12,639)

(13,738)

(13,265)

(13,176)

(14,234)

Gross Profit

3,470

4,831

4,144

3,592

5,300

4,873

5,535

EBITDA

 

 

(1,206)

804

(319)

(1,269)

1,027

1,297

2,018

Operating Profit (before amort. and except.)

(1,559)

445

(684)

(1,616)

670

950

1,741

Intangible Amortisation

(80)

(93)

(79)

(56)

(35)

(35)

(35)

Operating Profit

(1,639)

352

(763)

(1,672)

635

915

1,707

Share based payments

(182)

(180)

(42)

(50)

0

0

0

Exceptionals

0

0

0

(598)

(38)

0

0

Net Interest

1

32

(28)

(6)

(47)

12

20

Profit Before Tax (norm)

 

 

(1,558)

476

(712)

(1,622)

624

962

1,762

Profit Before Tax (FRS 3)

 

 

(1,820)

204

(833)

(2,326)

551

927

1,727

Tax

0

0

0

0

0

0

0

Profit After Tax (norm)

(1,558)

476

(791)

(1,678)

589

927

1,727

Profit After Tax (FRS 3)

(1,820)

204

(833)

(2,326)

551

927

1,727

Average Number of Shares Outstanding (m)

124.3

122.9

121.7

127.8

133.5

133.5

133.5

EPS - normalised (c)

 

 

(1.3)

0.4

(0.6)

(1.3)

0.4

0.7

1.3

EPS - normalised fully diluted (c)

 

 

(1.3)

0.4

(0.6)

(1.3)

0.4

0.7

1.3

EPS - (IFRS) (c)

 

 

(1.5)

0.2

(0.7)

(1.8)

0.4

0.7

1.3

Dividend per share (c)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Gross Margin (%)

25.1

29.4

24.7

20.7

28.5

27.0

28.0

EBITDA Margin (%)

-8.7

4.9

-1.9

-7.3

5.5

7.2

10.2

Operating Margin (before GW and except.) (%)

-11.3

2.7

-4.1

-9.3

3.6

5.3

8.8

BALANCE SHEET

Fixed Assets

 

 

2,679

2,657

3,542

3,484

3,606

3,321

3,215

Intangible Assets

474

612

1,826

2,058

2,523

2,520

2,626

Tangible Assets

2,205

2,045

1,715

1,426

1,082

801

589

Term Deposit

0

0

0

0

0

0

0

Current Assets

 

 

9,025

9,122

7,747

8,085

8,566

9,704

11,659

Stocks

4,207

4,572

5,886

5,126

5,250

5,105

5,591

Debtors

359

453

685

609

1,321

1,286

1,408

Cash

4,322

3,909

997

2,123

1,787

3,106

4,452

Other

137

187

179

226

207

207

207

Current Liabilities

 

 

(2,232)

(2,619)

(2,788)

(3,775)

(3,876)

(3,803)

(3,926)

Creditors

(2,091)

(2,619)

(2,788)

(3,775)

(3,876)

(3,803)

(3,926)

Short term borrowings

(142)

0

0

0

0

0

0

Long Term Liabilities

 

 

(99)

0

0

0

0

0

0

Long term borrowings

(99)

0

0

0

0

0

0

Other long term liabilities

0

0

0

0

0

0

0

Net Assets

 

 

9,373

9,160

8,501

7,794

8,295

9,222

10,948

CASH FLOW

Operating Cash Flow

 

 

(237)

899

(1,300)

1,080

305

1,646

1,672

Net Interest

0

0

0

0

0

0

0

Tax

0

0

0

0

0

0

0

Capex

(748)

(692)

(1,734)

(1,536)

(661)

(327)

(326)

Acquisitions/disposals

621

5

55

0

85

0

0

Financing

20

(296)

68

1,570

0

0

0

Dividends

0

0

0

0

0

0

0

Net Cash Flow

(344)

(84)

(2,912)

1,114

(271)

1,319

1,346

Opening net debt/(cash)

 

 

(4,410)

(4,082)

(3,909)

(997)

(2,123)

(1,787)

(3,106)

HP finance leases initiated

0

0

0

0

0

0

0

Other

16

(90)

0

12

(64)

0

0

Closing net debt/(cash)

 

 

(4,082)

(3,909)

(997)

(2,123)

(1,787)

(3,106)

(4,452)

Source: Company data, Edison Investment Research. Note: *Foreign exchange difference in other.

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Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Sealegs Corporation and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. 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Akari Therapeutics — Update 8 July 2016

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