Diary of an Investor: 02 - SanLorenzo (SL)
As a person who cannot afford to buy a yacht (yet), I thought of an easier way to benefit from the ultra-luxurious industry: SanLorenzo.
Business Overview
Born in 1958 near Florence, the Italian yacht manufacturer expanded its operations throughout the years until it became public in late 2019.
The company is now the second-biggest player in the industry with a total increasing market share of about 19%, computed on the number of total orders (the leader sits at 24% and shrinking).
SanLorenzo is widely recognised for its attention to detail and premium quality achieved thanks to the work of several local artisans with decades of experience. The company outsources the production of its yachts while maintaining strict control over high-value segments such as marketing and R&D. The “artisans business model” allows for higher flexibility as it relies on a vast and diversified range of suppliers (as demonstrated by strong performances during the pandemic). However, relying on third parties can also represent a problem and can decrease SanLorenzo’s bargaining power. To deal accordingly, in 2022 the company started a campaign of acquisitions and minority investments which aims at verticalizing the structure to secure access to key materials and processes.
SanLorenzo’s products are classified into 3 divisions: Yacht (between 24 and 38 meters), Superyacht (over 40m), and Bluegame (between 13 and 23m).
The Yacht division accounts for about 60% of sales, the Superyacht division for 30%, and the newest Bluegame division for 10%.
All segments are growing at double-digit, with the divisions’ respective growth being 10%, 19%, and 20% YoY.
Ultra High Net Worth Individuals (UHNWI) are forecasted to grow in the upcoming years, expanding the company’s target segment. Additionally, the yacht industry remains significantly under-penetrated (current penetration in the UHNWI is about 3%), offering attractive upside and opportunities to grow.
In the past few years, SanLorenzo managed to consolidate its market position thanks to a constant increase in orders, testified by the always higher backlog.
The company is closing the gap with market leader Azimut Benetti, which saw a decline in orders in 2023.
As mentioned before, the majority of investments are directed towards acquiring key suppliers in the value chain and expanding production capacity. However, it’s noteworthy to mention R&D investments: as regulations on emissions become more stringent, yacht manufacturers are forced to adapt. Even though I am sceptical about ESG investing as a driver of value, I am more comfortable knowing that SanLorenzo is developing models that will conform to new environmental standards. Additionally, I recognise the importance of delivering a product that customers want, and perhaps buying a “sustainable yacht” alleviates the conscience of billionaires.
These investments in sustainability are mainly focused on the fast-growing Bluegame division. Joint projects with cutting-edge giants including Siemens Energy, Rolls Royce, and Volvo are expected to deliver eco-friendly engines on SanLorenzo’s yachts, powered by hydrogen fuel cells.
The cherry on top is the company’s clear and professional financial reporting. SanLorenzo itself publishes reclassified statements, valuation graphics, and reliable forward guidance to help investors value the business, a much-appreciated activity that is unfortunately becoming rarer among publicly listed companies.
In summary, a well-run business with a strong supply chain to meet growing demand.
Valuation
As many of the company’s competitors are privately held and/or are of considerably different sizes, a relative valuation offered few insights into the competitive position of the firm.
I will summarize the key findings in the following bullet points:
Cheap-end valuation multiples (EV/EBITDA 9x vs. 11.5x median)
Best margins (15.5% vs. 10% median)
Best ROIC (44% vs. 17% median)
Note: these data were computed on a very restricted sample and could be misleading in depicting the overall status of the industry.
I instead focused more on the intrinsic valuation to understand how comfortable I was at the current price. Usually, when I perform a DCF, I am already almost certain about the quality of the business. The DCF merely gives me a numerical confirmation of my thesis, providing me with important edges over the margin of safety incorporated by the current price, which inevitably affects the decision on the portfolio allocation for the analysed stock.
I won’t dive deep into the assumptions of my DCF, but the narrative can be summarized in the following manner: high-single-digit growth and expansion of margins will continue the already existing positive trend of increasing profitability for the following 4 years. Given the business model, the company will need to invest to achieve such growth, as reflected by the Incremental Invested Capital Turnover. After the high-growth period, a transitionary period will make the revenue growth converge towards the risk-free rate (a proxy for the growth of the economy), accompanied by decreasing investments. In the stable stage, the company will maintain its competitive advantage (shown by the positive ROIC-WACC spread), growing at a constant growth rate again equal to the risk-free.
If you are reading this and have any questions regarding the in-detail assumptions I made during my valuation, I am more than happy to chat!
The company is undervalued by 11.9% with a target price of 45.93 (the benchmark price is my average entry price of 41.05).
Note: I always prefer to adopt a conservative approach when valuing stock to provide an additional cushion on the results.
Final decision
I decided to allocate 7.5% of my portfolio to SanLorenzo (av. buy price 41.05 on the 13th of March). This results in half the average weight of my other holdings.
Even though I don’t deem that the margin of safety at the buy price is particularly comforting, I still decided to open a position for three main reasons:
I like the business: a high ROIC, promising, and understandable business, run by people with decades of experience. I am therefore willing to hold the company for an extended period of time.
Full-year results will be released on the 15th of March:
Three scenarios can materialize:The company releases strong earnings and guidance, in which case I expect the stock to soar and I am happy about the entry price (at least in the short-term).
The company releases earnings and guidance in line with expectations, in which case I don’t expect particular movements.
The company releases below-expectations earnings and guidance, in which case, after revaluing the business, I would consider increasing my holdings to average down the price.
I have too much uninvested cash: one should never invest only because it has cash to spend. However, given the above reasons, my personal trade-off between keeping cash and investing in SanLorenzo tilts towards the latter option.
I will keep monitoring the stock to potentially increase my holdings as I am deeply convinced about the goodness of the business.
I hope this post was interesting and I thank you for your time.