Defense Programs And Naval Rearmament Will Drive Long-Term Marine Manufacturing Upside

Catalysts

About VEEM

VEEM designs and manufactures advanced marine propulsion, stabilization systems and high-specification engineering components for commercial and defense customers globally.

What are the underlying business or industry changes driving this perspective?

• Ramp up of long duration defense programs such as ASC refits, Hunter Class and HII supply, supported by security-cleared facilities and partially grant funded capacity, should drive multi year growth in high margin defense revenue and earnings.
• Global naval rearmament and plans to increase U.S. submarine output, combined with a shrinking Western foundry base, position VEEM as a scarce supplier of complex castings and propellers, supporting pricing power and structurally higher net margins.
• Expansion in propulsion capacity, adoption of robotics and automation, and the shift to supplying full shaft lines rather than standalone propellers increase value per vessel and operating leverage, which should lift revenue density and EBITDA margins as volumes grow.
• Growing adoption of large vessel stabilization and VEEM’s upgraded Mark II gyro platform with lower warranty costs and potential no maintenance technology support rising demand and a better cost profile, which is likely to enhance both top line growth and net profit.
• Customer focus on fuel efficiency and reduced carbon footprints, together with VEEM’s proprietary high tensile alloys and more efficient propeller designs, underpin premium product pricing and higher content per boat, which should benefit revenue and gross margins.

Assumptions

How have these above catalysts been quantified?

• Analysts are assuming VEEM's revenue will grow by 10.0% annually over the next 3 years.
• Analysts assume that profit margins will increase from 4.4% today to 7.5% in 3 years time.
• Analysts expect earnings to reach A$6.9 million (and earnings per share of A$0.05) by about December 2028, up from A$3.0 million today. However, there is some disagreement amongst the analysts with the more bullish ones expecting earnings as high as A$9.3 million.
• In order for the above numbers to justify the price target of the analysts, the company would need to trade at a PE ratio of 29.1x on those 2028 earnings, down from 37.2x today. This future PE is greater than the current PE for the AU Machinery industry at 17.2x.
• Analysts expect the number of shares outstanding to grow by 0.16% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.3%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• VEEM is increasingly leveraged to large naval programs such as ASC refits, Hunter Class and HII, so any delay, downscaling, reprioritisation of defence budgets, or failure to progress from pilot contracts to full production could leave new specialised capacity underutilised and slow the expected step change in revenue growth and operating leverage, pressuring earnings.
• The company is expanding propulsion and gyro capacity and adding highly specialised, security-cleared machinery ahead of full demand visibility, and if global shipbuilding or superyacht orders soften, or defence volumes do not ramp as anticipated, VEEM could face lower capacity utilisation and higher fixed cost absorption, compressing EBITDA margins and net profit.
• The long term success of the Sharrow partnership and VEEM’s new gyro technologies is uncertain, and prolonged development cycles, slower than expected market adoption, or technical issues with new products could limit pricing power and mix improvements, constraining future revenue and net margin expansion that are currently expected to accelerate.
• VEEM operates in a high cost manufacturing jurisdiction and is relying heavily on automation, robotics and proprietary alloys to stay competitive, so any further wage inflation, cost overruns on capital projects, or inability to pass higher input costs through to customers could erode gross margins and dampen earnings even if top line demand holds up.
• Changing U.S. tariff policies and broader macro uncertainty in key marine markets may delay or reduce superyacht and commercial vessel orders, while also complicating OEM planning cycles, and if this persists it could slow propulsion and shaft line volumes and undermine the assumed steady growth in revenue and earnings.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The analysts have a consensus price target of A$1.15 for VEEM based on their expectations of its future earnings growth, profit margins and other risk factors.
  
• In order for you to agree with the analysts, you'd need to believe that by 2028, revenues will be A$91.3 million, earnings will come to A$6.9 million, and it would be trading on a PE ratio of 29.1x, assuming you use a discount rate of 8.3%.
  
• Given the current share price of A$0.77, the analyst price target of A$1.15 is 33.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.