VMT – Vmoto Limited

Vmoto Limited (ASX:VMT and London Stock Exchange:VMT) is a leading global scooter manufacturer and distribution group specialising in electric powered two wheel vehicles.  Vmoto’s electric scooters have chic European design and German engineering.

Vmoto wholly owned its state of the art manufacturing facility in Nanjing, China, which has an estimated production capacity of 500,000 units of scooters per annum.  Vmoto also have offices in West Perth, Australia and Bremen, Germany.

Vmoto has one of the widest global distribution networks of any electric scooter manufacturer in the world, being represented by more than 28 distributors in 30 countries in the geographic regions of Asia Pacific, Europe, North America, South America and South Africa.

The group operates two primary brands: Vmoto and E-Max.  The electric scooter market is experiencing high growth and Vmoto is a well positioned brand in this space.  The company also supply to a number of customers on an OEM basis.

What is there to like about Vmoto’s business?

  1.  Vmoto is a growing brand selling electric scooters to about 30 countries worldwide.
  2.  The company owns outright their own 30,000 sqm production facility outside of Shanghai in Nanjing, China.
  3.  The production facility has the capacity to produce up to 500,000 electric scooters per annum.
  4.  Current production is less than a quarter of capacity so they have plenty of room to grow.
  5.  Vmoto turned cash flow positive in the December 2013 quarter.
  6.  And reported a maiden Net Profit after Tax for the 2013 Financial Year which ended December 2013.
  7.  The 1st quarter of 2014 was also cash flow positive and the beginning of the year is historically their slowest time of year. So profit and cash flow for the year should increase quarter-on- quarter throughout the year.
  8.  The company has minimal and manageable net debt of about $1 million as of April 2014.
  9.  And, electric scooters are a very environmentally friendly mode of transport.

What are the reasons for continued business growth?

  1.   Vmoto have distribution agreements in place with companies such as Chrysler and another company called PowerEagle to supply up to 150,000 units by 2015.
  2.  They now have 16 retail stores in China open with plans to open more.  The retail stores are where their profit comes from.  This draws comparisons with a company such as ARB (selling their own four wheel drive parts with a very successful retail model).
  3.  Vmoto supply to the main markets for scooters being China, India, Indonesia and Brazil. China is by far the biggest market though.
  4.  In a lot of Asia, people cannot afford to buy a car but they can afford to buy an electric scooter.  Plus scooters are a large form of transport for many people across Asia and developing countries in any case.
  5.  The company announced yesterday 2nd July that DHL (the leading courier company) is trialing the use of Vmoto’s scooters.  Supplying to a worldwide company such as DHL would open up a new and large market for the company.

What are the risks facing this business?

  1.  A more recent risk is a bit of instability within the board. The company is presently searching for an Australian based director.  However, the business has its current momentum from the work done on building the business over the past number of years.  The need to fill a director role is not going to have a significant impact on the trajectory the business.
  2. Another risk I see is that the company falls into the trap of taking on too many distributorships which are good for turnover although may not be good for long term profitability.  Long term, I think they will be much better off focusing on developing their brand and selling via their own retail stores.   Wih the company growing from eight retail stores to 16 retail stores in the past year, I think management know that the best outcome for the business is to continue to develop the profitable retail brand and business model.
  3. The third risk is that current shareholders are diluted with a capital raising at some point.  Despite the company now producing positive cash flow, for a business growing this fast, the difficulty is managing cash flow appropriately.  I am sure however if a capital raise does occur, it may lead to a temporary setback in the share price for the long term good of the business and long term share price.  In saying that, I will be delighted if there is no need to raise capital.

Is it run by able and trustworthy management?
When researching this business, I watched a video by one of the directors Mr Olly Cairns.  I was suitably impressed with the way Mr Cairns articulated the work done by the company over the past few years with the development of the manufacturing facility and the current activities being rolled out to grow the business.

Is it trading at a bargain price?
Based on cash flow reported by the company and the momentum of that cash flow and profitability I believe the company is trading at a bargain price.  I estimate the company will generate NPAT of between $1 Million and $2 Million in 2014.  Based on the lower $1 Million figure, I estimate the company to be valued at 6 cents a share in 2014 (December is year end).

And, based on my own estimates of profitability growth, I think the intrinsic value of the business can rise significantly over FY15 and FY16.  However, being my own estimates, while my numbers are conservative, they are “not as dialed” as I would like.

Company Code Rank Today’s Share Price Margin of Safety 2014 Forecast Valuation 2015 Forecast Valuation 2016 Forecast Valuation
Vmoto Limited VMT Gold 5 4.8 cents 20% 6 cents 10.4 cents 21 cents

The Chart
Vmoto has pumped the air in the tyres of its scooters.  It has been in an uptrend for the past year or so.

click to enlarge

In summary, Vmoto is a great business with an excellent product. Vmoto has a significant pipeline of work from other manufacturers such as Chrysler, a good international distribution network, growing number of retail stores and some exciting opportunities for the future.  By my calculations, the company is trading at a good discount to my estimate of intrinsic value with my estimates of that value growing over the foreseeable future.

This article is published by Dean Mico.

Disclosure: The Edge Fund owns shares in Vmoto Limited.

The information provided in this article is intended for general use only. The article is intended to provide educational information only. Please be aware that investing involves the risk of capital loss. The information presented does not take into account the investment objectives, financial situation and advisory needs of any particular person, nor does the information provided constitute investment advice. Under no circumstances should investments be based solely on the information herein.

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