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.
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.
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.
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.