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Courage Marine: BDI plunging.

Tuesday, January 17, 2012

Yesterday's Business Times reported that the Baltic Dry Index (BDI) fell to an 11 month low. Today, it fell another 3.799% to 1,013.



The decline is attributed to a worsening glut of ships. Rates are now below operating costs in the Pacific Ocean.

Capesizes, the largest dry bulk carriers cost US$7,437 a day to operate (excluding fuel). However, rates on round trip voyages in the Pacific fell to US$6,471 a day, down 80% from a month ago.

Seasonal decline in demand to ship commodities to China, port disruptions in Australia after a recent cyclone and a larger number of ships will continue to exert downward pressure on rates in the short run.



My investment in Courage Marine late last year at 10c a share is now underwater. What do I plan to do? Nothing. Why?

Courage Marine is a company with a strong balance sheet and I doubt it is going to sink. It might not do well but it will most probably survive the bad times.

For those who are thinking of possibly investing in Courage Marine, there could be a better time to do so. For those who are already vested, we have to ask if we run the risk of selling at the bottom if we exit now.

With my investment in the company accounting for only some 1.5% of my total portfolio value, I will simply hold on.

Investing in financially sound companies, I am able to stomach paper losses which are likely to be temporary in nature.

Related post:
Courage Marine: Bought more at 10c a share.


24 comments:

Drizzt said...

do u think their bs is strong? because they seem to be taking losses and rapidly depleting their pool

AK71 said...

Hi Drizzt,

Balance sheet is strong at the current point in time. Of course, "strong" could mean different things to different people.

In terms of revenue and the bottom line, it is challenging and likely to remain so in the near future.

So, it has a strong balance sheet but its income statement might be something else.

jason said...

Hey AK, beware as ship owners are running very short of cargos for their ships. Another 100m dwt is expected to come onboard in 2012 (think of it as another 600 over 150,000 dwt capesizes)....this will wear and tear any balance sheet so pls keep an eye on the quarter earnings.Many bankruptcies are on the books.

AK71 said...

Hi Jason,

The article in The Business Times reported that 2012 will see another 4% increase in capacity. So, I agree with you that testing times are ahead.

Courage Marine's management has already issued profit warning and they will probably be sorely tested this year.

JTK said...

Hi AK,
Thanks for sharing.

Is it high time to cut loss on Courage Marine as the global economy outlook may not be so good for the next 2 years due to the overhang from Europe? And China may go for Soft/Hard landing. But if China economy is still good, then the shipping stock may probably be held on.

What is your view on these.

Drizzt said...

AK,what to you is a strong balance sheet?

AK71 said...

Hi JTK,

I do not know what you mean by "overhang from Europe". However, if you are referring to the current debt crisis in Europe and how it would unravel, I must say I have no idea although my recent blog post which highlighted Mr. Lee Kuan Yew's view on the matter is of some concern.

Regarding China, I do not think it would go into a recession. In the last crisis, three countries in Asia avoided recession: China, India and Indonesia. This is likely to be the case once more.

As for Courage Marine, it is in for tough times. I do not doubt it. As to whether we should cut losses, I have shared in earlier blog posts on how I would sell on rebounds as prices go down a river of hope. This, however, has nothing to do with FA and is a personal thing. People should do what they are comfortable with. ;)

AK71 said...

Hi Drizzt,

At its simplest, a net cash position.

Musicwhiz said...

Hi AK71,

The CFS may be a better guide as to how the Company is doing. While I agree the Balance Sheet looks clean as at Sep 30, 2011, do note that this is rather industry-specific and Balance Sheets are simply snapshots of a particular point in time. Therefore, one should also rely on "flow" statements such as the Income STatement and Cash Flow Statement.

9M 2011 shows negative OCF of US$6.3 million, against 9M 2010 +ve OCF of US$16.7 million. What I do not understand is why the drastic turnaround in cash flow for the Company? Does this imply the business is not stable by nature but is instead cyclical or unpredictable? The dividends paid and repayment of borrowings depleted quite a bit of cash which would have helped Courage Marine to tide through the upcoming difficult times, I feel.

The litmus test might be the upcoming full year 2011 results. So let's wait and see.

Regards,
Musicwhiz

AK71 said...

Hi MW,

Very happy to hear from you on this. Your FA is always highly valued. :)

Yes, in my reply to Drizzt's first comment, I also said that its Balance Sheet might be strong but its Income Statement could be something else.

Courage Marine's business is definitely cyclical in nature and I expect its Cash Flow from Operations to be affected negatively given recent developments.

Will the management be able to navigate the very difficult times?

JTK said...

Hi AK,

Thank you for your comments.
"Overhang" means debt overhang from some of european countries.
If China does not go into recession, I think there is a good chance for Courage Marine to recover from losses.
Maybe we just wait until 2011 results before doing anything.
What do you think the good entry price to average down?

AK71 said...

Hi JTK,

Yes, I am not doing anything right now. Just waiting for the next results presentation.

Courage Marine decided to concentrate on the energy needs of China early on. So, they ship mainly coal. I do not expect Chinese demand for coal to decline.

There has been much talk about new ships adding to the capacity of dry bulkers in 2012 to the tune of 4+%. However, there was an article which talked about a large number of older ships being scrapped. So, the increase in capacity could be ameliorated.

Anyway, I am not an industry insider and will wait for more information.

Share price seems to have found a floor if not the bottom. The MACD has been rising while the decline in price saw support at 7.8c while the low in December 2011 was 7.5c.

Anonymous said...

Hi AK,

Will they still be net cash when the 2 new-building vessels are delivered ? The dry bulk industry is extremely sickly now but it should recover once the over-supply of vessels is absorbed - when no one knows ! If CM is still alive when it occurs, then it should recover its earnings and equity. Meanwhile, it will be a bumpy ride. Its larger peer - Golden Ocean - halted dividend in 3Q 2011 so I don't think the outlook will be improving any time soon. What can shippers do now ? I guess buy vessels cheaply, repay debt and try to find 1-3 year time charter. GO and CM has been expanding their fleet so let's see whether it impacts their bottomline this year.

Cheers,
Nick

Anonymous said...

Hi MW,

CM is a dry bulk spot charter market player. It is the epitome of cyclical business ! Where the Baltic Index goes, it will follow.

Nick

(Not Vested)

AK71 said...

Hi Nick,

Yes, I remember you were quite positive on Golden Ocean's business before. This was some time back, of course.

As for Courage Marine, it scrapped 4 vessels and bought 2 new vessels in the last few months, iirc. It will take a 60% bank loan for the 2 new vessels and pay cash for the balance.

There will be consolidation in the shipping industry, for sure. Companies which survive the shake up will ride the next up cycle.

AK71 said...

Hi Nick,

If I remember correctly, Courage Marine's management has secured long term charters which account for more than a third of their business now.

Anyway, long term charters are also not set in stone. I read somewhere about charterers refusing to pay recently. Was it Cosco related? My memory is failing.

jason said...

Dry bulk market - u have seen BDI falling below crucial 1,000 mark. THis is just the beginning of events to come. Even if China were to stay intact on 9-9.5% GDP, there is still not enough cargo to go around ALL the ships (>7500 vessels and over 600m dwt including new builds) Worse is when Brazil's Vale new fleet of 4m dwt (10 ships of 400k dwt each) comes into play in 2012. This combined with rising bunker prices will kill just about any ship owner without secured cargos/long term contracts and strong staying power. These will be the likes of Norden/Oldendorff etc. Huge players like NYK/MOL/K Line/COSCO are feeling the heat.Recovery is expected to be at least end 2013 (mid 2013 being very optimistic)Those who had their war chests wiped out during 2009 will have its BIG test coming in 2012. We are expecting many to go under when European banks begin looking for about EUR3 trillion to recapitalise their balance sheets, European banks being the biggest shipping lenders. (Nordea/DVB/DB/DNB Norse/RBS etc) To answer your last Qn - yes COSCO refusing to pay charters in order to force them to renegotiate the rates. Even Golden Ocean had to bow down to them and come to the table.

AK71 said...

Hi Jason,

I am taking note of all you are saying. You are, after all, an industry insider. :)

Do you think ship owners might scrap older ships to reduce excess capacity?

jason said...

Scrapping in 2011 was record highest ever - due to poor markets and attractive scrap prices. Unfortunately, scrap metal prices are on the decline following the drop in steel/steel prodt prices. Likely there will be more ships on sale for further trading if the scrap prices cant match 2nd hand markets. That so, over-capacity will remain a huge problem. Scrapping is now of course the last ditch attempt but when push comes to shove.... boh bian! Capesizes and handysizes have some of the largest elderly tonnage so lets see how it plays out.

AK71 said...

Hi Jason,

Thanks for sharing the details. :)

Scrapping older ships would ameliorate overcapacity. It would be interesting to know what is the proportion of "elderly" ships as compared to total capacity in the industry. Hmmm...

jason said...

Elderly tonnage represents about 20-22% of total ships - roughly about 120m dwt vs total 600m dwt (estimated from the top of my head)
However, majority of these small ships of the 120m oldies are deployed on coastal business (china, india,indonesia) so not likely to be scrapped. Overcapacity of vessels vs cargo demand is so wide we need to scrap at least nearly 20% of the current world fleet to move back into equilibrium - that scenario will never happen hence stressful times until end 2013/2014.In fact, there is another huge orderbook delivery for 2013 as well due to high orders in 2010 albeit nothing as ridiculous in 2007/2008.

AK71 said...

Hi Jason,

All points noted. Thanks so much for sharing the numbers. I really appreciate it. :)

It seems like 2012 is going to be a most difficult year. I am curious as to how Courage Marine's management will navigate these treacherous waters.

In the meantime, Gong Xi Fa Cai! :)

Ray said...

Hi AK,

Seems like CM is moving back up. congrats.
Any changes to your view about its value?

AK71 said...

Hi Ray,

Well, you know that I would sell on rebounds and not when prices are forming new lows. The bleak picture that is the business of dry bulk carriers in 2012 and possibly 2013 means that the prudent thing to do is to reduce exposure. ;)

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