OXE Marine: Making Progress

OXE Marine reported its preliminary Q2 results slightly better than our estimates with sales of SEK 22m (Redeye est. 20m) and an EBIT of -12m (Redeye est. -14m). The gross margin was well below our expectations at 8% vs. estimated 22%, and down from about 23% in Q1’20, the deviation is mainly derived from lesser sales of spare parts and cost of disruption in the production. The gross margin has varied widely between quarters, and we believe it will continue to do so until OXE has reach grown into a more normalized production rate.

COVID-19
The Corona Crisis has only had mild effects on OXE Marine as expectations on near term deliveries were relatively low. In contrast, the order book has continued to increase, currently amounting to SEK 57m. When entering the second half of 2020, we believe OXE has set an offensive sales strategy by recruiting within several areas as marketing and sales. With the OXE300 now at market, it’s up to evidence for the company to deliver a substantial scale-up of sales where we expect sales of SEK 120m in 2021. We get back with updated estimates after the definitive Q2-report.

Changes in production
We have previously raised concerns regarding the low profitability and production issues on the lower-powered outboards in the company’s product offer. To decrease the assembly cost, OXE has decided to move its production from the contract manufacturer in Uddevalla to Poland and the US. We do believe that there are more strategic perspectives than decreasing the cost of production of the OXE200 in the US. For example, we know that the CRADA, currently evaluating outboard suppliers for the US agencies as the Navy and Coast guard have expressed a preferred interest in suppliers located within the US. By moving the production of the OXE200 into the US, the chances of a favorable turn-out increase.  Currently, the final production site in the US is not set, but the company expects to restart the OXE200 production in 2021 and believe that the current stock of OXE200s to be sufficient until then.

Collaboration with Parsun
OXE Marine has signed a distribution agreement with the largest Chinese outboard manufacturer Parsun, to supply mainland China with high powered diesel outboards. Parsun’s offer today consists mainly of lower powered outboards below 100hp. We believe Parsun, with a vast number of dealers and customers to be an attractive and strategic partner to access the Chinese market. The companies are further considering a deeper collaboration with local assembly and sourcing of parts at Parsun´s production plant in China. At this point, the press release does not disclose any indications of the potential volumes or the cost of distribution to the Chinese market. Still, we believe the yearly potential unit sales could be larger than a hundred units within governmental end-users and if adding the commercial end-users another 3-400 potential units per year. We are optimistic about the deal, but for conservative reasons, do not make any significant estimate adjustments based on the deal at this point.

We recognize that OXE is fundamentally advancing and is making solid progress. Anyhow, we remain conservative with unchanged estimates and a base case valuation of SEK 1.3 per share. Our current base case valuation does not include any significant Parsun orders in the near term. This could, however, trigger a revaluation if the agreement materializes nicely. In recent time, the share has steeply appreciated approaching our bull case valuation of SEK 3.5. With the increased valuation, the expectations from the market have increased, putting additional pressure on the company to scale up sales in the coming 6-12 months, which will most likely be the most interesting in the company’s history so far.