While many people are familiar with high-end luxury brands such as Hermès and Ferrari, fewer people have heard of Sanlorenzo. Like Hermes and Ferrari, Sanlorenzo is a timeless luxury brand that caters to ultra-high net worth individuals with luxury yachts. The keyword here is "timeless," which indicates that there will be a demand for its products for decades to come. Is Sanlorenzo a good investment? This is what I am going to investigate in this analysis.
This is not a financial advice. I am not a financial advisor and I only do these post in order to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.
Since attending the workshop with Phil Town, I have decided to make some changes to the layout of my analyses. I will perform additional calculations and also provide a brief explanation of why the company is significant to me. If you want to learn more about my company evaluation process, please visit the "MY STRATEGY" section on my website.7
For full disclosure, I should start by mentioning that at the time of writing this analysis, I do own shares in Sanlorenzo. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to accomplish this can be found here. Sanlorenzo currently represents 2% of my portfolio, making it a relatively small position. If you want to purchase shares (or fractional shares) of Sanlorenzo, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $100.
Sanlorenzo is an Italian luxury yacht manufacturing company that specializes in designing and producing custom-made motor yachts and superyachts. These vessels are tailored and customized to meet the specific needs and desires of exclusive customers. The company was founded in 1958 and is based in Ameglia, Italy. Sanlorenzo operates in three divisions: the Yacht Division, the Superyacht Division, and the Bluegame Division. The Yacht Division is dedicated to the design, manufacturing, and marketing of composite yachts between 24 and 40 meters long under the Sanlorenzo brand. It is the largest division, contributing approximately 61% of the revenue in 2023. The Superyacht Division is dedicated to the design, manufacturing, and marketing of superyachts in aluminum and steel ranging from 44 to 73 meters in length under the Sanlorenzo brand. It is the second-largest division, contributing approximately 28% of revenue in 2023. The Bluegame Division is dedicated to the design, manufacturing, and marketing of composite sport utility yachts between 13 and 23 meters long under the Bluegame brand. It contributed approximately 11% of revenue in 2023. Sanlorenzo also offers an exclusive range of services dedicated only to Sanlorenzo and Bluegame customers. These services include training at the Sanlorenzo Academy for crew members, as well as maintenance, restyling, refitting, and charter services. Sanlorenzo generated most of their revenue in Europe (69%), followed by the Americas (11%), Asia-Pacific (11%), and the Middle East and Africa (9%). Sanlorenzo's business model involves constructing a limited number of boats per year, expanding production by introducing new lines and models without saturating the existing ones. Sanlorenzo has a strong brand reputation, being recognized as the epitome of excellence and exclusivity. This strong brand reputation is what gives Sanlorenzo its moat.
The CEO is. Massimo Perotti. He joined Sanlorenzo in 2005, where he acquired the majority of the company. He assumed the role of chief executive officer and later became the chairman. He is still the majority shareholder today, owning approximately 58% of the shares. Prior to acquiring the majority of Sanlorenzo, Massimo Perotti worked at Azimut Benetti alongside its founder, contributing significantly to the company's growth. He became an executive in 1987 at the age of 27. He joined the board of directors of Azimut Benetti with delegated powers in the early 1990s and was appointed chief executive officer of the main "Azimut division" in 1996 at the age of 36. He graduated in Economics from the University of Turin with a final grade of 110/110. Since acquiring Sanlorenzo, he has been leading the company on a path of consistent and robust growth. He was announced as the national winner of the Entrepreneur of the Year Award in 2019. The Entrepreneur of the Year Award is bestowed upon entrepreneurs who have excelled in their careers for their ability to create value with innovative spirit and strategic vision, making a significant contribution to the growth of the Italian economy. Massimo Perotti has done a remarkable job at Sanlorenzo, consistently growing the company. I appreciate that he is the majority owner of the company, indicating his commitment to further develop the company and provide returns to shareholders. I am very confident in Massimo Perotti leading Sanlorenzo moving forward.
I have determined that Sanlorenzo has a moat. And I feel very confident about management as well. Now, let us analyze the numbers to determine if Sanlorenzo meets our criteria for possessing a strong competitive advantage. In case you want an explanation of what the numbers represent, you can refer to "MY STRATEGY" on the website.
The first metric we will investigate is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. Sanlorenzo was founded in 1958, but it did not go public until December 2019. Thus, we only have numbers from 2020 and onwards. Sanlorenzo has managed to deliver a Return on Invested Capital (ROIC) above 10% in all four years since its Initial Public Offering (IPO), which is impressive. It is even more impressive that ROIC has been above 15% in three out of the four years and above 20% in two out of the four years. ROIC has increased every year since its IPO, which is something I like to see as an investor. We only have a small amount of historical data, but the data we possess is impressive. I hope Sanlorenzo will continue to deliver such a high Return on Invested Capital (ROIC) in the future.
The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. We only have data for the past four years because Sanlorenzo went public with its IPO in 2019. Nonetheless, the numbers are impressive as Sanlorenzo has managed to increase its equity every year since its IPO. And not only has it increased equity, but the growth rate has been around 80% every year since its IPO. These numbers are probably not sustainable but are very impressive.
Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. I use levered free cash flow margin because I believe that margins provide a better understanding of the numbers. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. As explained previously, we only have data for the past four years since Sanlorenzo went public in 2019. Sanlorenzo has delivered a positive free cash flow in all four years since its IPO, which is encouraging. Free cash flow decreased from 2022 to 2023, which is not ideal. However, 2023 was a challenging year for most companies. It is also worth noting that Sanlorenzo made some acquisitions in 2023, which have affected free cash flow. The levered free cash flow margin also decreased in 2023 and is at its second-lowest point in the four years since its IPO. I wouldn't describe it as concerning, but it is something worth monitoring as I would like to see it increase in the future. The free cash flow yield indicates that Sanlorenzo may be trading at a decent valuation, but we will revisit this later in the analysis.
Another important aspect to consider is debt. It is crucial to assess whether a business has a manageable level of debt that can be repaid within a 3-year period. We do this by dividing the total long-term debt by earnings. After analyzing Sanlorenzo's financial statements, I have concluded that the company is debt-free. I prefer companies with no debt. Thus, this is another positive sign for Sanlorenzo.
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Based on my findings so far, I believe that Sanlorenzo is an intriguing company. However, no investment is without risk, and Sanlorenzo also has its fair share of risks. Macroeconomics. Sanlorenzo is exposed to the risks associated with the global economic-financial situation and the economic trends in the specific geographic markets where its products are targeted towards a customer base consisting of affluent individuals. Major economic events affecting the global economy or the economies of the countries where the company's customers are located, such as financial and economic crises, may pose a risk of customers losing their willingness to make a purchase or deciding not to complete the purchase of a yacht that has already been ordered. In this case, Sanlorenzo would be forced to look for a new buyer while retaining any amounts paid by the customer as advances, in compliance with the signed contracts. Sanlorenzo's business model also includes provisions for the possibility of withdrawing used yachts for exchange. If the macroeconomic situation deteriorates, the subsequent reduction in demand could adversely affect the sales times and the sale value of used yachts, leading to a decrease in Sanlorenzo's total revenues and an increase in finished product inventories. Dependent on suppliers. Sanlorenzo uses suppliers and contractors to procure components or services essential for constructing its yachts. Sanlorenzo adopts and enforces the highest production standards to guarantee its customers the delivery of yachts of the utmost quality and reliability. It means that only a few suppliers are able to provide Sanlorenzo with the components of this high quality. Thus, if any of these suppliers are unable to deliver these components within the established timeframe for any reason, Sanlorenzo cannot simply source them from alternative suppliers. Therefore, Sanlorenzo may experience delays in delivering yachts to its customers. As a result, Sanlorenzo could receive requests to terminate contracts that are already in the process of being executed or requests for compensation, which would result in increased costs for the company. Furthermore, it may also be possible to damage the Sanlorenzo brand if they need to delay the delivery of yachts. A backlog that is slightly decreasing. By the end of 2023, Sanlorenzo's net backlog was 1.042 yachts, compared to 1.070 yachts at the end of 2022. It is the first year since the IPO that Sanlorenzo has experienced a decrease in the backlog year over year. There can be several reasons for a declining backlog. A decreasing backlog may be a portentous sign of lagging demand but may also signify improving production efficiency. However, as Sanlorenzo's business model involves building a limited number of boats per year and increasing volumes by launching new lines and models without inflating existing ones, it could indicate that the demand for its products is slightly declining. It could be temporary, as 2023 was a year full of macroeconomic challenges, but it is still something worth monitoring.
There are also numerous reasons to invest in Sanlorenzo. One reason is the favorable conditions for its products. Sanlorenzo's customers belong to the social class of the Ultra High Net Worth Individuals (UHNWI), characterized by yachting penetration rates among the lowest in the luxury segment. This indicates a strong potential for unexpressed demand. This factor, combined with the expansion of demand resulting from the steady increase in the number and wealth of UHNWIs, especially in North America and APAC, represents an ample opportunity for growth. The number of ultra-high net worth individuals is expected to grow by more than 24.000 a year until 2026, which is higher than historical growth rates, as UHNWIs only increased by 17.000 a year from 2013 to 2021. The new connectivity technologies also enable work to be conducted on board and extend the time the owner can spend on board, thereby increasing the appeal to younger clientele. This has led to ultra-high-net-worth individuals purchasing yachts at a younger age than before. Between 2016 and 2020, the average age of Sanlorenzo customers was 56 years old, while in 2021 and 2022, the average age of Sanlorenzo customers is 49 years old. Developing its service business. Sanlorenzo is prioritizing the development of services, which have enormous potential that is only minimally exploited today. Refitting and maintenance are high-potential, countercyclical activities that consistently expand with the growing and aging global fleet, potentially evolving into a captive business. The number of refittings for 40mt+ yachts has increased from 2.240 in 2003 to 5.555 in 2022, and is expected to continue growing as the global motor yacht fleet ages. Another service business is chartering, where yacht owners can charter their yachts through Sanlorenzo to generate income when they are not using their yachts. Chartering is an asset-light service that leverages an already existing international presence to further expand the Sanlorenzo customer experience and potentially attract more customers to the Sanlorenzo brand in the future. Acquisitions. Management believes that acquiring high-end niche brands in market segments that do not overlap with those where Sanlorenzo is already present and in which it is not considered strategically appropriate to use the Sanlorenzo brand, as was done in the yacht segment below 24 meters with the Bluegame brand, and as may be the case in the sailing market, can be a growth catalyst in the future. Sanlorenzo evaluates opportunities in line with its philosophy, seeking clear synergies in terms of technology and geographical distribution. Furthermore, Sanlorenzo has also made other strategic acquisitions to strengthen its business. In 2023, they acquired a 65% stake in Sea Energy, a strategic partner in the design, production, and installation of naval electrical and electronic systems. Sanlorenzo also acquired a 33% share of Duerre, a company engaged in the artisanal production of exceptionally high-quality furnishings, specifically designed for superyachts. This acquisition means that Sanlorenzo now holds a majority stake, owning 66% of the business.
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Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators.
The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 2,65, which is from 2023. I have selected a projected future EPS growth rate of 8%. Finbox expects EPS to grow by 7,4% in the next five years, but management anticipates growth in high single digits. Additionally, I have selected a projected future P/E ratio of 16, which is twice the growth rate. This decision is based on Sanlorenzo's historically higher price-to-earnings (P/E) ratio. Finally, our minimum acceptable rate of return has already been established at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be €22,63. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy Sanlorenzo at a price of €11,31 (or lower, obviously) if we use the Margin of Safety price.
The second calculation is known as the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company essentially represents its return on investment. The minimum annual return should be at least 10%, which I calculate as follows: The operating cash flow last year was 117, and capital expenditures were 32. I attempted to analyze their annual report to calculate the percentage of capital expenditures allocated to maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 22,4 in our calculations. The tax provision was 36. We have 34,732 outstanding shares. Hence, the calculation will be as follows: (117 – 22,4 + 36) / 34,732 x 10 = €37,60 in Ten Cap price.
The final calculation is called the Payback Time price. It is a calculation based on the free cash flow per share. With Sanlorenzo's Free Cash Flow Per Share at €2,45 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is €28,14.
I find Sanlorenzo to be an intriguing company, and I appreciate that the CEO is the majority shareholder. Sanlorenzo has delivered an impressive Return on Invested Capital (ROIC) ever since its Initial Public Offering (IPO), and it has increased every year. Free cash flow decreased in 2023, as did the levered free cash flow margin. However, 2023 was a challenging year for most companies, and Sanlorenzo also made some acquisitions. Sanlorenzo may face some macroeconomic challenges now and in the future. However, a recession doesn't necessarily affect ultra-high net worth individuals, as evidenced by Sanlorenzo's performance during the 2008 Financial Crisis. The company demonstrated the strength of its business model by maintaining revenues when many of its competitors were forced to shut down. Sanlorenzo is dependent on suppliers because they produce high-quality products. The components they receive from their suppliers should also be of high quality. Thus, Sanlorenzo cannot simply change suppliers, indicating that this is a risk worth monitoring. Another thing worth monitoring is the decline in the backlog. It was just a slight decrease in backlog from 2022 to 2023, but it was the first time since the IPO. Sanlorenzo should benefit from various trends among its customers. The customer base of the company is expected to grow at a higher rate. Customers are anticipated to spend more time on their yacht and purchase a yacht at a younger age. All of this should benefit Sanlorenzo. Sanlorenzo also has great potential in its services business, where I find the countercyclical activities of refitting and maintenance particularly intriguing. Sanlorenzo may also benefit from acquisitions. These could range from large acquisitions, such as acquiring the Bluegame brand and expanding into the sailing market, to strategic acquisitions aimed at reducing the risk from suppliers by becoming majority stakeholders in these companies. I really like the company, and I believe that buying shares below the Ten Cap price of €37,60 could be a compelling investment. If I didn't already have a position, I would probably consider buying Sanlorenzo at a higher price, such as €40.
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