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Courage Marine: Riding the waves of recovery.

Saturday, April 3, 2010

Admittedly, I have always thought of the shipping industry as a very difficult one.  Huge capital expenditure is required and the ongoing maintenance expenses are substantial as well.  I also do not like how its huge capital expenditure is on assets which are depreciating in nature.  Furthermore, its fortunes are tied inextricably with those of the global economy.  So, during difficult times like the recent crisis, shipping companies suffered badly.  Anecdotal evidence tells of hundreds of ships anchored off the shores of Singapore, idling away as there is too much spare capacity.

However, I am very much aware of the global economic recovery which is now well underway.  I targetted mainly three stocks in the second half of 2009: Healthway Medical for its defensive growth model, Golden Agriculture for the increasing demand for CPO and Saizen REIT for the compelling valuation and a contrarian play.  This year, I also increased my exposure to LMIR and AIMS AMP Capital Industrial REIT. Lately, I became interested in CapitaMalls Asia as I believe it would benefit from the rise of the Asian consumers.

Recognising that the global economic recovery is going to strengthen in 2010, it would be pure bigotry for me not to consider the shipping industry as a logical beneficiary. Latching once more on the theme that Asia is leading the world in this recovery, I decided to look at shipping companies with more of an Asian exposure.

Having learned some valuable lessons from this past crisis, I decided that the company I invest in should not have high gearing and it should be one that could control its costs well.  These factors are crucial for the survival of a company in hard times.  In this last crisis, many companies issued rights and even NOL went to shareholders with hat in hand despite having a powerhouse shareholder like Temasek Holdings:

"NOL's proactive capital raising will strengthen its balance sheet, enhance its financial flexibility and allow it to seize investment opportunities," Ong Beng Teck, managing director of investments at Temasek said in a statement. June 2, 2009 (REUTERS).

By some stroke of luck, the first shipping company I looked at in detail, Courage Marine, a dry bulk shipping business, has many of the qualities I am looking for. Established in 2001, the company has exposure primarily in Greater China.  This is their niche in the industry and fits well with my aim to look for a company which will benefit from a stronger and recovering Asia.

Being wary of the large capital expenditure that shipping companies have to make, I was very pleased to find that Courage Marine only buys and operates second hand vessels.  This maximises return on investment and minimises depreciation cost. Of course, what I then worried about was the cost of maintenance but they have been able to manage this as well, keeping cost of maintenance low.

I suppose this is the same rationale that buying a second hand car makes more sense than buying a new car for us common folks most of the time.  A new car depreciates rapidly in the first three years of its life.  If the cost of maintaining a second hand car is less than the premium we have to pay in order to buy a new car, it's a no brainer.

Next, I looked at gearing.  Courage Marine has very low gearing.  Gross gearing as of 31 Dec 2009 was at 6.2%, a reduction from 8.5% a year ago.  Taking into consideration that they have cash and cash equivalents of more than US$43m and total debt of only US$6.8m, Courage Marine is in a net cash position!

Courage Marine is not immune to economic slowdowns but through prudent management, it managed to reduce its debts and declare a dividend of US 0.47c per share for the year ended 31 Dec 2009.  Based on the last done price of S 20.5c, that is a yield of 3.1% (based on US$1 = S$1.37).  Not too attractive but try looking at the preceding three years when it declared dividends of US 1.888c, US 3.115c and US 1.41c.  Sounds more interesting?  This is a company that shares its profits with its shareholders.

Courage Marine has a NAV of US 10.41c per share.  At an exchange rate of US$1 = S$1.37, the NAV is S 14.26c per share.  At the last closing price of S 20.5c, it is now trading at a premium of 44% above NAV which I do not think is expensive.

Finally, what really caught my eye is the strong return to profitability in the fourth quarter of 2009.  Compared to a year ago, gross profit in the fourth quarter increased 523% and net profit margin improved to 25.9%!  I fully expect its revenue and profits to continue improving in 2010.  Taking last quarter's EPS as a guide, assuming that things stay stagnant, Courage Marine would have an annual EPS of US1.08c or S1.48c which, based on a share price of 20.5c, gives a PE of 13.85x.  Not expensive.  EPS is more likely than not to improve in 2010.

Courage Marine is a company that has a niche in the shipping industry.  It capitalises on its expertise in that niche and concentrates on what it knows best.  It is excellent in managing costs and it is conservative when it comes to financing new capital expenditure.  All these characteristics, I believe, translate into a strong competitive edge and business resilience.

When I arrived at this conclusion on 26 March, the next step was to look at the charts.  Its price closed at a high of 21.5c that day.  To me, 21.5c looks like the top of a base formation and I decided to wait and see if it would break out or retreat.  The next day, it went on to touch a high of 22.5c.  I thought I had missed the boat (pardon the pun) after all the FA that I did.

Fortunately for me, the price weakened to 20c on 31 Mar and seeing that it's where the flat 200dMA is and seeing how the rising 20dMA might just push up the price, I bought some then.  There is a chance that price might weaken further seeing how the MFI is in the overbought region but as the OBV does not suggest any heavy distribution activity, I believe that downside should be limited, perhaps to 19c, the confluence of the 100dMA and 50dMA.  A retest of the previous low would mean a floor of 17.5c although I do not think this likely.

I believe that Courage Marine is a well run company that is riding the waves of recovery and the market will recognise this in the usual way.  I would accumulate on weakness.


Anonymous said...

HI AK71, are you buying this stock for long term? if short term, what wil be the next resistance? :D

AK71 said...

Hi Anonymous,

I cannot tell you whether it is for the long term. As long as the Asian economies do well, I believe Courage Marine would likewise perform positively. If I see signs that things have changed, I would let go. :)

If you are buying this for a trade, you want to see its price close convincingly above the neckline at 21.5c. Then, the eventual target is 27c. If you look at the chart in this post, it is quite easy to spot. A 30% gain. Not too shabby but it might take a while to get there. ;)

CT said...

Hi AK,

There has been some analyst coverage on Otto Marine. Have you looked at that stock?

AK71 said...

Hi CT,

I have not looked at Otto Marine. Would you like to share your views on this one? Thinking of getting some?

CT said...

Much like what you shared, I have been paying more attention to the shipping industry as an impt sector to be vested in for 2010. and so am looking for a counter to allocate my limited funds. my rather vague strategy at the moment is to attempt to choose a few sectors and pick 1 potential outperformer from each.

most of the analyst reports recommend sembmar, keppel and NOL. not sure if iv missed the boat on those. therefore looking for a small-cap stock with gd near-term prospects. Otto marine happens to be a BUY from Philips Security which is why i asked if you had taken a look at it.

i was wondering if you could make a comparison betwn Courage, Otto and maybe Yangzijiang. im not sure what your strategy is. do you buy multiple companies in a single sector or bet on one?

RK said...

Hi AK,

How did you derive the eventual target of 27c? Because that's the highest it went back in Oct?

And what's the significance of line at 23.5c?

Sorry if the questions sounded dumb, I'm just starting to learn about candlesticks... thanks.

AK71 said...

Hi CT,

As the global economy recovers, an increased demand for shipping services is natural. However, I am less sanguine about a demand for new vessels since, logically, spare capacity would have to be utilised first and there is a lot of spare capacity out there, from what I know.

So, I am not really interested in ship building companies. YZJ is in ship building and a quick look at Otto Marine shows that they are also in ship building.

I am also not impressed by Otto's numbers. Based on their presentation (26 Feb 10), they have a net gearing of 62% and the stock is trading at 2.38x to book value. Its order book seems to be shrinking too.

Any reason why Philips recommended Otto as a BUY?

I don't really tell myself to buy the leader in a sector or if I should invest in a few stocks in a sector. I just go for well run companies which are value buys. :)

AK71 said...

Hi RK,

27c was not only the high back then, it was accompanied by a huge trading volume. Many were probably chasing the breakout but it didn't turn out well. Many were probably caught that day and would remember 27c till this day. So, 27c is likely to be a strong resistance.

The line at 23.5c marks a resistance that was tested many times before various unsuccessful breakouts but the fact that it was taken out on a few occassions without a follow through suggests that it is not as strong a resistance as 27c.

Anonymous said...

Hi, AK71,

nice analysis on Courage Marine.

What u say is extremely correct... not vested yet though but it's in my watchlist.

U may want to look at Pacific Shipping Trust
It is a shipping investment trusts and offers good dividend yield, just like REITS.

Amazingly, its business model allows it to remain profitable, even in 2009, unlike most other shipping business...

Let me know what's yr view about its FA

"It provides structured financing solutions to established shipping companies, thereby generating visible and stable cashflow stream through long-term charters. By acquiring vessels and leasing them to reputable charterers on long-term bareboat or time charters, PST seeks to generate a steady stream of high-yielding income for its Unitholders."

(i hv sold most of my healthway stocks away... my friend was played out too by those big boys. But, I may still buy back if it dips... see how it performs in Q1 & Q2 first.)

- newbie123

AK71 said...

Hi newbie123,

If I remember your purchase prices correctly, you must have made quite a bit of money selling away your shares in Healthway Medical. Good for you. :)

I am sorry to hear that your friend was played out by BBs on Healthway and I hope he did not suffer any losses.

With regards to PST, I have lost interest in shipping trusts, including FSL and Rickmers. Unlike REITs, these trusts have rapidly depreciating assets. The very high gearing is a big turn off for me. PST's gearing is 45%, if I am not wrong. Not my cuppa tea.

Courage Marine, I believe, will do better in time. I would be accumulating on weakness. :)

Anonymous said...

Hi, AK71,

haha... my friend did not lose any money... just that the upside potential of HW fall short of our expectations because of this played out...

True. PST did hv high gearing but what attracted me was the high dividend yield. Not vested yet though.

I am also looking at shipping and commodity sector now too but have not yet picked one yet... still observing.


Raelynn said...

Quite a few institutes have Buy calls for ship building counters like Otto Marine, but a personal preference of mine is to actually steer clear of these market darlings unless i really know what i'm doing. I agree that combining FA with TA is a better idea than just FA alone. my partner bought Tat Hong (a market darling that fell out of favour) due to his FA analysis but it clearly didnt rise (he bought it at 0.90). he's smiling but a little lost on what to do with his F&N- to sell? to hold? I wonder if TA would have signalled differently on his action to buy Tat Hong.

AK71 said...

Hi Raelynn,

Yes, we have to do our own FA and TA. Otherwise, we would be investing or trading blind.

Tat Hong? I made some money on this counter before. No longer vested. Technically, it is in a clear downtrend. It could go lower although it has a white spinning top today and this could be a reversal signal. Needs confirmation.

Musicwhiz is vested in Tat Hong and did some thorough FA on the company. Maybe, you would like to take a look at his blog.

F&N is having a good run. Knowing when to buy is important but knowing when to sell is equally so. It is beginning to look quite overbought and we might be seeing the beginnings of a negative divergence between price and volume. You might want to set a target price.

Raelynn said...

dear AK,

that's what i told him too about F&N, about setting a target price. but i think he's quite reluctant to sell as F&N is a major stakeholder in APB, if APB continues to do well, chances are that F&N will continue to be in an upwards run?

AK71 said...

Hi Raelynn,

I cannot advise you on how F&N and APB would do in future as I am not familiar with these companies. I do know that F&N has been deriving a lot of revenue from its property business over the years and that has nothing to do with APB.

If we go back to basics, we have to remember that a company's value and a company's stock price are not really the same thing.

Since your partner is a pure FA guy, ask him what he thinks is a fair value for F&N. If he cannot do this, his FA needs brushing up. Granted that different FA practitioners would have a different opinion of fair values but they do have opinions. ;)

If your partner could come up with a fair value, then, it's easy since FA would tell you to sell once the market price exceeds fair value.

Such an approach would satisfy your partner and get you out of a bind at the same time. :)

jason said...

Hi AK71,

Was reading up on your treatise of Courage Marine. However, word of caution is that the dry bulk shipping segment is not as rosy as it looks in the longer term. China & India driving the current commodity boom (mainly iron ore and coal!!)will not be able to absorb all the new ships that is coming onboard within the next 3-4 yrs up to 2014. I keep very up to date with the dry bulk shipping industry due to occupational hazard. :)
Will be glad to share some reading materials on this aspect - total dry bulk ships on sea now is about 470m dwt with another 250-300m dwt coming on board in the next few years.
Translated means we will need nearly 12bn population demand of dry bulk cargo to make full use of that fleet.
Let me know if you want to find out more about dry bulk shipping information.

AK71 said...

Hi Jason,

Your comment re-appeared. :)

You have a valid and interesting point. Please share more with us here. Thank you.

Anonymous said...

I actually agree with Jason, as i have read reports on YZJ and Cosco that the supply of new ship would be flooding the industry since the orders were booked during the 2006/7 boom and many were being delayed. So i was pretty skeptical about your call on this shipping stock, but too afraid that i might sound too amateur haha. Nevertheless, this counter is on my watchlist.

Anyway, perhaps the Baltic Dry index may be a good indicator for comparison?


AK71 said...

Hi Kelvin,

I am an amateur investor, you know. ;) I kind of remember quite a few orders for new ships being cancelled as well. However, I did not do the research on how many new dry bulk carriers are being built and would be delivered in the next 2 or 3 years. Now that Jason has prompted me on this, I would also be interested in knowing where these new carriers are being deployed.

Of course, now being vested in Courage Marine, competition amongst the dry bulk carriers would be a big concern for me, especially in the Greater China region. Not so worried about how many new containerships are being delivered, for example.

I also feel that even though there will be new dry bulk carrieres being delivered, this is probably happening over time and not overnight. So, there could still be some tightness in supply in the near future and this would still be an opportunity to make some money in a company like Courage Marine which we have to admit is very well run, if we look at its numbers, compared to its peers such as Mercator.

Yes, I am keeping an eye on the BDI. It is at 2981 today and has been forming higher lows. This is also double of what it was a year ago. In the short run, I am expecting the BDI to continue the uptrend. When Courage Marine hits my eventual target, I would consider divesting.

Please feel free to comment on my posts and not hesitate. I am learning, just like you. :)

jason said...

hi AK71, there are monthly publications that cover dry bulk extensively. You can try - links to lots of shipping information, ship indexes and its weekly newsletter has got plenty of information also on dry bulk shipping.......
Just so i give you an idea of what dry bulk shipping is all about category of ships:

VLOCs (very large ore carriers) - primarily used to carry iron ore, Vale will become the owner of the largest VLOC fleet in the world.
Purpose is to get economies of scales to move iron ore from Brazil to China, compete against BHP/Rio who are much nearer vis-a-vis Australia.

Capesizes: Moving mostly the hard dry bulk cargoes viz iron ore + coal (usually 120,000 dwt to 220,000 dwt range)

Panamax: moves coal/iron ore/grains (70,000 dwt to 120,000 dwt)

Handysizes/Handymax/Supramax: moves everything under the sun - offers the greatest flexibility due to their size, can stop at any port of call to unload (5,000dwt to 69,000dwt)

To gauge charter rates, you have to look at their respective indexes : BCI (baltic capesize index), BPI (panamax index), BHI (handy index)......charter rates for panamaxes have overtaken capesizes! This was driven by the grains markets - 5 biggest producers being USA, South America (Argentina/brazil), Russia, Europe, Australia.

Right now, fleets are looking to Asia for business - China (iron ore + coal), India (coal), Japan (iron ore, coal), Korea (coal, iron ore) why? Cos Asia houses some of the biggest steel producers in the world! China - Baosteel/Shagang/many more. India - Arcelor Mittal. Japan - Nippon Steel. Korea - POSCO

Right now,USA gets its iron ore from backyard (domestic + Canada). Europe still imports from Australia/Brazil but not much cos their economy is still in the toilet for now.

Coal is very much part of the steel production (used in the blast furnaces) and power plants, of which India especially is lacking in the latter while China needs the former! Why the boom in China? Biggest car mkt in the world (13.6m cars in 2009), property boom, infrastructure spending from new stimulus package in 2010.

So ships will be everywhere but mostly with an eye for Asia. China is gobbling up every known commodity on earth - copper/aluminium/zinc etc, wheat, cotton....rates keep going cos charterers pay more to get ships out from the far east to Europe/baltic/atlantic.

So long as Courage Marine can focus its biz on China/Asia/India exclusively, the upside is there. And we all know doing biz in China is all about guan xi......:) Keep that guan xi and you are OK.

As for the progressive new ships coming on board, the ship owners will suffer the most whilst the charterers will be laughing to the bank - i can pick and choose my shipper!

This should keep you going for quite a while! lol

AK71 said...

Hi Jason,

Thank you very much for a wealth of information! You are not joking about your occupational hazard. Pretty hazardous, I see. ;)

What seems to be consistent with my analysis is the demand in Asia is strong and growing. However, you made a good point in that the excess capacity around the world might zero in on Asia in the search for business. This would possibly put a lid on profitability for dry bulk carriers.

Will have to keep an eye on Courage Marine as they release their quarterly results. It is a well run company, no doubt, but the forces of competition that you have highlighted could very well impact their earnings negatively.

Have to stay nimble with this one. Thanks again, Jason. Much obliged. :)

jason said...

Well, there is no denying that this is the year of dry bulk shipping thanks to the power of Chindia (the coined phrase for China + India) which will last for a while until the question of the excess capacity comes in. The iron ore imports for China is estimated to be about 670m tonnes for 2010, more than 50% of the total world consumption!
Now charter rates have risen strongly due to the massive ship congestion in Australia. There are about total 350-380 ships (capes, panamax, handies)at Australian ports queueing to load coal - mainly due to the huge demand from Chindia + the recent storms that have hit some of the main coal port terminals. Hope that Courage marine's ship isnt stuck there else there may be breach of contract.

AK71 said...

Hi Jason,

Thank you so much for this new input. It has bolstered my confidence that Courage Marine should continue to do well in the coming months (until new capacity in the competition comes in).

Courage Marine's share price has gone up nicely in the last session and I might just divest if it hits my target price within a short period of time. Thanks again and have a good weekend. :)

jason said...

Anytime man!Occupational hazard, i have to keep abreast of all matters related to dry bulk on a daily basis....... The most dynamic sector of shipping right now as containers only just discharged from ICU on recovery mode, tankers are still in limbo despite the crazy oil prices.

AK71 said...

Hi Jason,

Very comforting to know that dry bulk shipping is the most dynamic sector of shipping at the moment. I get that feeling too. :)

Courage Marine will probably make some nice pocketmoney for me in the near future. ;)

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