Robin research covers small and medium-sized companies with an attractive risk/reward profile mainly in Europe and North America.
Disclaimer: this is neither a buy and sell recommendation nor private advice. Investing in companies carries a risk of permanent loss of capital. Before investing in a company do your own research.
Summary
Leading new generation of more sustainable luxury yachts
Steady and growing cash flow generation
EBITDA and EBIT margin expansion
Price power and product scarcity
CEO holds 60% of the shares
The Stock
Market: borsa italiana
Ticker: SL
Market Cap: €1400M
Liquidity: illiquid
Dividend: payout 30-40%
Company
Sanlorenzo is an iconic luxury brand that designs, produces tailor-made yachts, superyachts and sport utility yachts for wealthy clients all over the world.
The company was founded in 1958 and is based in Ameglia, Italy.
The current CEO Massimo Perotti acquired the company in 2005 with the objective of transforming it and create a world leader in luxury yachting.
Let's take a closer look at each of the segments in which the group operates:
Yacht: production of composite yachts between 24 and 38 meters in length under Sanlorenzo brand.
Superyacht: production of aluminium and steel superyachts between 40 and 68 meters length under Sanlorenzo brand.
Bluegame: composite sport utility yachts between 13 and 21 meters. The group entered this market segment as recently as 2018.
The company sells more than half of its production in Europe while the classic Yacht division is the biggest revenue contributor to the accounts. The market trend and where the greatest opportunity lies in the future is in APAC and the Americas.
For the production of these marvels of naval engineering, the company has four production sites located in the north of Italy in the Mediterranean Sea.
The number of Sanlorenzo employees is quantifiable at around 25% of the total workforce. The remaining 75% is made up of contractors' employees specialised at tasks such as furnishing, electrical installation or plumbing ; this arrangement helps to maintain flexibility and cost variability.
On the other hand, the Bluegame division is fully outsourced to third parties.
One of my favourite features of the company and the industry is the continuous inflow of cash flows into each of the projects. Normally at the signing of the contract the client advances around 10% of the total amount. Then, as certain stages are reached during the execution of the project, 60-70% of the money is progressively received. Finally, on delivery of the yacht, the client pays the remaining 10-20%.
Basically, it is the customers who finance the company, reducing the costs of debt and, on the other hand, having a visibility in the foreseeable future of the money that is expected to come into the company. On average, it takes 7-16 months to build a yacht, depending on the project, and for the superyacht division, the lead times increase from 24 to 46 months for larger yachts.
Market
The total recreational boating market was valued at a total of €22B in 2018 and the pie is split between inboard and outboard powered boats and sailing boats.
Sanlorenzo's target market is inboard motor boats, larger than 24 metres in length and highly customised with an approximate value of €9B.
This would give Sanlorenzo a market share of 8% of the total.
Historically Europe is the major producer of luxury yachts but if we zoom in on Italy alone we see that they really are the undisputed leaders, taking market share away from the rest of the world as a whole. Today more than 45% of world production comes from Italy with growth of more than 10% CAGR.
Looking at the global luxury yacht market, it is expected to continue to grow at a rapid pace even after the high growth of 2021 and 2022 as it was a sector positively impacted by the trend in the covid years of outdoor activities. For the next 5 years it is estimated that the market will continue to grow at more than 10% CAGR.
The main reason to expect more than 10% growth in the luxury yachting sector is the exponential increase in the concentration of wealth in the hands of a few people, known as Ultra-high-net-worth individuals (UHNWIs); people with at least $30 million in investable assets. This is the company's target customer.
Over the last few years the number of UHNWIs owning a luxury yacht has been 3% of the total but is expected to fall to only 2.5% in the coming years due to strong growth in the target market.
In addition to this positive trend we have to add that after the covid crisis people's thinking has changed and this benefits the producers of the luxury yacht market.
First of all, the age of the customer purchasing a yacht has been drastically reduced and, on the other hand, the number of days spent annually on the yacht by customers has increased. All these changes are related to the new habits after the crisis where people are able to work remotely even on a luxury yacht with satellite connection as it is happening now.
Competition
In this market there are more competitors of Sanlorenzo especially in Italy and also in Northern Europe as the most representative competition.
In the graph above we can see that Sanlorenzo competes primarily in the 30-40 and 40-60 metre divisions where the market is more fragmented and there is more competition. Here the Azimut-Benetti group is the strongest competitor in terms of yacht production capacity. On the other hand, when we move to lengths of 60-90 metres and especially longer than 90 metres, competition is more concentrated.
Interestingly, clients tend to ask for more and more yachts in length (there is never enough space inside the yacht) so the market is adapting its production capacity to the new needs over the years.
Another important point of view is that since 2018, the closure of production sites worldwide is accelerating by increasing the number of project/production sites for the most resilient companies. The luxury yacht market is cyclical so the weaker ones in difficult times tend to disappear.
It is certainly interesting and a real opportunity for companies with a competitive advantage to gain more and more market share in a market where the target customer is growing steadily, especially in North America and APAC.
So now let's move on to analyse the most similar traded competitor in the market. The truth is that there are very few listed companies in this sector but we are lucky and there is a comparable listed company.
The company concerned is The Italian Sea Group ($TISG) located in close proximity to Sanlorenzo's production facilities but specialising in large luxury yachts. In any case, it can be useful as a theoretical exercise.
We observe that TISG is of poorer quality and where Sanlorenzo manages to double the turnover of its competitor. In reality they do not compete in exactly the same segment and it could even be argued that they are "complementary" in the market creating between the two of them and Azimut-Benetti a monopoly that attracts customers from all over the world to see the wonders of Italian built yachts.
In fact, if you like this sector I advise you to analyse TISG as it also has great potential as a company. However, I will stay with Sanlorenzo, and I will explain why later on.
Business Strategy
The company has a long history, operates a luxury good in a niche market where there are fewer and fewer players and a tendency towards concentration.
It is in Sanlorenzo's interest to maintain a long waiting list and to manage to launch this sensation of uniqueness and scarcity in the market in order to achieve its strategy of a desirable good. Therefore, an aggressive organic growth strategy does not seem to be the most appropriate in this sector, in addition to the need for a higher CapEx investment to expand production.
Approximately every 4.5 years, 2/3 of their clients request a new yacht project, which with the passage of time tends to be more expensive projects due to the effect of increasing the meters in length that the market tends to have. The company plays in its favor that it has an incredibly loyal customer base to the brand.
The company's target is to grow high single digit until 2025 (excluding acquisitions) and to achieve an EBITDA of at least 19%. To achieve this, the company plans to increase selling prices by +3% annually and keep costs under control.
The second strategy is to stabilise revenues to the company. We have observed that the market has a cyclical component but this can be mitigated. How is Sanlorenzo planning to achieve this? By increasing the services it wants to provide to its customers in the form of extended warranties on its yachts and other value-added services.
It should be borne in mind that approximately every 10 years yachts need a refit to bring them up to date in terms of equipment and refurbishment. On the other hand, yachts when they are not in use need a place to rest, be maintained, watched over, equipped, etc. I believe that the company is also thinking of making some kind of investment in this sense, although we must wait for the next moves in acquisitions.
If the company manages to position itself in services and maintenance then it will have an anti-cyclical component that will definitely make the business resilient.
The third strategy pursued by the company is via acquisitions. These acquisitions, although they may be of other companies that may fit in, for the moment it is more interested in vertical integration upstream and downstream supply chain.
The company has recently taken positions within its critical suppliers of in-house yacht equipment (specialised carpentry, electrician, etc.) to ensure greater production capacity and add financial leverage to these small businesses.
In addition, it has recently acquired a major player in the APAC market that provides sales services to customers and showrooms.
Final takeaways
Sanlorenzo has come to conquer this market. We find ourselves as a base in a market that is constantly growing, very fragmented and with competitors that have been rapidly decreasing in the last 10 years. There are many tailwinds in this luxury niche market where only the best can remain.
Sanlorenzo has little track record on the stock market although its CEO with a position of >60% has been at the helm for more than 15 years. The projections they give for the future are conservative from my point of view and I believe they are capable of providing greater value due to the quality of the business they have and their name and reputation.
The unique business model where they receive 70%-80% of the money before the yacht is delivered ensures client financing and a steady cash flow generation that allows the company to expand, consolidate vertically, distribute dividends and even buy back shares. This is impressive.
There is one important detail that I have not discussed above and that is the company's strategy to create a new market using hydrogen and fuel cells to achieve carbon-neutral luxury yachts.
This project will enable the launch of new models equipped with this technology from 2024. To develop this new product, the company has teamed up with leading companies Volvo, Siemens and Rolls-Royce.
So thank you very much for your attention and I hope you liked this new idea. Remember to leave comments!
Thanks for the nice report. I have also looked into Sanlorenzo and its competitors (Ferretti, The Italien Sea Group). At the moment I'm not sure who really has the edge in terms of market share, brand and moat. Which of the listed companies is the Ferrari of the sea....
The market share figures from the annual reports are of course difficult to compare and in each case the reporting company is the leader based on the respective classification of the boat categories.
Whether the decreasing number of shipyards really plays into Sanlorenzo's hands is not yet entirely clear in my view. Do they have patents or technical advantages that no other yacht manufacturer has?
I am also unsure how secure the moat is against Asian competition. On the positive side, in this product category (super yachts) money is not an issue, which means you don't have to fear cheap competition. Strangely enough, you can see a positive margin development, but with a net margin of 11% you are still a long way from Ferrari, for example, with a net margin of 21%.
Nonetheless, thank you for your reports, I enjoy reading them because they shed light on companies outside the masses.