If you look long enough and deep enough into the depths of the ASX’s small-cap and micro-cap sectors, you can find some little-known companies that are outstanding global leaders in their respective fields. Here are three of the best of them.

1. VEEM (VEE, $1.11)
Market capitalisation: $144 million
One-year total return: +146.1%
Three-year total return: +40.6% a year
Forecast FY22 yield: n/a
Analysts’ consensus valuation: n/a

I confess that prior to writing this article I hadn’t heard of VEEM, but the Perth-based marine engineering company is more than 50 years old, and has been listed on the ASX since 2016, when it was floated by the founding Miocevich family, at 50 cents a share.

VEEM is a marine engineering company that makes proprietary gyrostabilisers and propellers, and valves that regulate the flow of fluids – everything from fuel, hydraulic oil, fire retardant and fresh water – on a vessel. Its products are used in vessels ranging from luxury motor yachts, ferries, commercial vessels, oil rigs, and warships and submarines. At its manufacturing facility in Perth VEEM operates Australia’s largest non-ferrous foundry.

Simply put, VEEM is a world leader in at least three areas:

• marine valve technology – VEEM supplies components to Australia’s Collins-class submarines, the Anzac-class frigates and the Hobart-class air warfare destroyers;
• high-performance propellers, fin systems and specialised components – VEEM is the leader in that market, with the major boat (motor yacht and commercial work vessels) builders in Europe and North America supplying VEEM propellers as standard; and
• gyrostabilisers.

The company has had a great FY21 so far, signing a supply agreement with Dutch-based Damen Shipyards, Europe’s second-biggest shipbuilder (and the world’s biggest builder of “small” ships), which conducted sea trials of the first VG1000SD VEEM Gyro – which the company describes as the “world’s largest and most powerful marine gyrostabilizer” – on a Damen-built offshore oil field supply vessel in the Gulf of Mexico. The VG1000SD is the fourth and largest of VEEM’s gyrostabilizers, and is aimed at the large-vessel (up to 90 metres) heavy-duty marine stabilization market, for example, commercial workboats, which usually rely on fin systems. VEEM says there is “no alternative product” in that market.

The stabilisation (roll reduction) results exceeded Damen’s expectations. VEEM and Damen now have a three-year supply agreement under which Damen will offer the VEEM Gyro range as an option on its Fast Crew Supplier (FCS) vessels, and the Dutch firm will recommend the installation of a VEEM Gyro when marketing these vessels. Damen Ships has since ordered a second VG1000SD and a third order has also been received, from a private owner.

The success of the VG1000SD and the implications for VEEM moving into the large superyacht/commercial/defence market – in the size of vessel appropriate for a VEEM gyrostabiliser – extends VEEM’s market to US$14.6 billion ($19 billion), of which it is barely scratching the surface. Broker PAC Partners says VEEM has a product that would be very hard for a competitor to replicate, and a “material first-mover advantage that should last for years.”

In the meantime, VEEM’s revenue was $44 million in the COVID-hit FY20, with EBITDA (earnings before interest, tax, depreciation and amortisation) of $6 million, earnings per share (EPS) of 1.1 cents, and a dividend (unfranked) of 0.4 cents. By FY23, broker PAC Partners expects revenue of $77.6 million, EBITDA of $17.5 million, EPS of 6.5 cents and a dividend of 2 cents. PAC Partners has a price target of $1.50, while fellow broker Euroz Hartley’s target is $1.31.

2. Audinate Group (AD8, $7.53)
Market capitalisation: $574 million
One-year total return: +28.5% a year
Three-year total return: +34.6% a year
Forecast FY22 yield: no dividend expected
Analysts’ consensus valuation: $9.85 (Thomson Reuters), $10.03 (FN Arena)

I looked at Audinate a year ago when the stock was at $5.71. Audinate is a digital audio-visual networking technologies provider that has patented a world-leading means by which audio-visual (AV) systems are connected and transport media over standard IT networks, and are able to communicate with each other. The company’s flagship technology, called Dante, is an audio-over-internet protocol (IP) networking solution, which has effectively become the global standard, used extensively in the professional live sound, commercial installation, broadcast, public address, and recording industries. Dante is estimated to have eight times the market penetration of its nearest competitor product.

Dante comprises software and hardware that is sold to and integrated inside the AV products of Audinate’s original equipment manufacturer (OEM) customers, the roll-call of which is a Who’s Who of world AV – containing the likes of Sony, Yamaha, Sennheiser, Bose, Bang & Olufsen and Roland. The company also sells application software through its own channel to enable customers to manage and control these installations.

Audinate possesses the much-prized “network effect,” in which the Dante platform becomes more attractive as it is adopted by more different original equipment manufacturer customers, because the end-users value the inter-operability it gives. About three-quarter of new electronic products that are coming to market include the Audinate Dante protocol, and the company is growing at about 17 times the rate of its nearest competitor.

Now Audinate is moving into the video market, with the release of first OEM Dante video products expected in FY21. The company says the expansion into video has the potential to double its audio networking business, in time.

While Audinate was hit by the COVID pandemic, which particularly hammered the market for live events, it has rebounded to the extent that its US$7 million revenue in the March 2021 quarter was a new quarterly record. A demand rebound in the higher education and corporate sectors is expected to boost results going forward. Profitability in FY21 and FY22 will be line-ball, but Audinate looks to be right back on track.

3. Atomos (AMS, 95.5 cents)
Market capitalisation: $209 million
One-year total return: +78.5% a year
Three-year total return: n/a
Forecast FY22 yield: no dividend expected
Analysts’ consensus valuation: $1.35 (Thomson Reuters), $1.365 (FN Arena)

I looked at Atomos as one of “Four Under $1” a year ago with the shares trading at 64 cents, and the stock doesn’t look like it will be below $1 for long (it pushed as high as $1.12 in February). The Melbourne-based Atomos Limited develops and manufactures a range of equipment for the global content creation market, such as cameras, monitors and accessories; many of its products, including its precision monitor-recorders and switchers, are viewed as world-best.

Atomos’ range of products – its Ninja, Inferno, Shogun and Sumo product ranges – are hardware devices that are made to sit on top of the cameras made by all of the major camera manufacturers; the Atomos device take images directly from the sensor of the camera, and then enhance, record and distribute them in high-quality formats for content creation using the major video editing software programs. The products help video and photo creators upload, create and edit content. Since its establishment in 2010 (it listed in December 2018), Atomos has established strategic relationships with all of the main technology providers within the video world, including Apple, Adobe, Sony, Canon, Panasonic, Nikon and JVC Kenwood.

In particular, Atomos’ strong relationship with Apple’s ProRes RAW format, released in 2018, has been a game-changer; Atomos creates monitor-recorders for ProRes RAW, and these are credited with revolutionizing the editing landscape for video professionals, enabling high-standard content creation with lower production costs. Because of its long-standing partnership with Apple, Atomos is the only company licensed to record “natively” on the ProRes RAW format. The Atomos units are integrated into cameras made by Panasonic, Sony, Nikon, Canon, Fuji and Olympus, with the resulting content edited in Final Cut Pro X on Apple Macs. This combination has become a de facto global standard.

These products are not only aimed at video professionals: Atomos understands that the explosion of social media has made a lot of people effectively “prosumers,” and it says its purpose is to create and deliver ground-breaking technologies and products that “democratise the creativity of content in the video age.”

This attribute means that Atomos actually benefited from an explosion in video useage and production during the COVID-19 pandemic, after initially being slammed. Its six-month period to December 2020 was its strongest half-year ever, with revenue at $32.8 million, its gross margin at 44.9%, and EBITDA of $3 million representing its most profitable six months ever, up 210% on the equivalent half in 2019. Cash flow more than doubled, to $4.3 million.

Atomos says sales momentum has continued into the second half, and whilst cautious given the global COVID situation, AMS expects “continued good progress.” Product launches and upgrades continue to be well-received in the marketplace. Brokers expect profitability in FY21 at net profit level, and price targets for AMS are quite bullish.

Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regard to your circumstances.