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Marco Polo Marine: A price I would not sell at.

Wednesday, September 24, 2014

This is an email exchange with a reader on Marco Polo Marine:

From Y:

AK, 

marco polo drop to 33 cent, you think good value to average down somemore?
actually i have quite a lot, 65 lot already. paper losses 13%. :(




My reply:

Hi Y,

I first got into Marco Polo Marine at 31.5c and 32c. I kept buying even at 42c as I believed that the stock was undervalued even at that price.

Later on, I blogged about how I reduced my long position given the developments in the company. I lost some money in the process. However, it was the right thing to do.

At 33c a share now, it is not a price that I would sell at. It is a price I would think of getting some at. This is simply because it is at such a huge discount to NAV.

However, given the weakness of its tugs and barges business and also the lack of certainty with regards to its pending rig business, I want to make sure that my exposure to its stock is at a level that will not cause me to lose sleep.

Best wishes,
AK


Related posts:
1. Managing exposure in AK's investment portfolio.
2. Portfolio review: Unexpectedly eventful.
3. Reason for price weakness.

15 comments:

E H said...

Hi AK

Whether it's barges, tugs or rigs, you need to have demand from you before you can make one, sell them, charter out or convert.

But the problem is, there are many of such barge/tug/rig-related yards out there. Some are positioned better than others. Some have the backings of local governments on tax incentives or loans. Thus, some get the shorter end of the stick.

Demand wise, I see it faltering. Margins seem to be getting smaller. Technology is improving, thus the quality and lifespan of new vessels produced are getting better and longer respectively. This results in less demand for new vessels and less demand for conversions/repairs.

You know what I like? Tankers shipping LNG, and FLNG facilities. Maybe Marco Polo should have a go at them.

AK71 said...

My replies on FB:

The transformation of MPM from a tugs and barges owner and operator to being an OSV owner and operator was what attracted me. Unfortunately, the tugs and barges business is a legacy business and cannot be terminated with the press of a button.

Its decision to become a rig owner was something not in my initial investment thesis. I rather liked the bold move although it would be financially demanding. If the tugs and barges business were to pull its own weight, it would be OK. Unfortunately, they have suffered months of weakness which seems to be due to a slow down in business activity in the run up to the Presidential election.

Now, I am just holding on to my smaller exposure to the stock and waiting because tugs and barges are not going the way of the Dodo and MPM have been in this business for decades. OSVs are transforming the business. The rig will be the big game changer for MPM.

Related post number 1 at the end of this blog post explains my actions with regards to Marco Polo Marine and why I didn't do with it what I did with Yongnam when prices ran up.

We should know our motivations for being invested and action plans that we should stick to. If there should be new developments which affect our investment thesis, having a framework will help us to decide whether to scale up or down our exposure.

AK71 said...

Hi E H,

I think the CEO of Marco Polo Marine knows that tugs and barges are a drag on the business performance and if he did not lead the transformation of the company to be in the OSV business, the company would be well and truly sinking now.

It is his intention to slowly eliminate the tugs and barges but I have a feeling that there is some resistance internally being a legacy family business. This is a minus.

As for the rig, Indonesia's Cabotage Law will kick in at the end of 2015 to include rigs like the one MPM ordered. So, there is a good chance of chartering it out at a rate higher than the current going rates.

Marco Polo Marine's plate is probably more than full now. So, no new directions for now, please. LOL. I would rather wait to see how they develop greater competence in what they are doing now and deliver better results with the on-going transformations.

betta man said...

On the topic of osv, vard has dropped from around $1.10 to $0.845 recently. Is vard severely undervalued now ?

AK71 said...

Hi betta man,

At one stage, I was looking at Vard but decided to just go in for a trade. They have their own problems which I don't fully understand.

Having said this, I cannot say that I fully understand Marco Polo Marine's business too but I think I understand it a bit better than Vard's. ;p

finance4uandme said...

Hi AK,

How would you compare Marco Polo Marine and Otto Marine?

Otto Marine may not be as undervalued compared to Marco Polo Marine in terms of Price-Book Ratio. However, in my opinion, capabilities-wise, Otto Marine has a larger fleet of OSVs/PSVs to support offshore activities as compared to Marco Polo as well as experience in operating them as well.

So, if the offshore segment recovers with higher oil prices, Otto Marine has higher chance of clinching offshore building, chartering and operating contracts compared to Marco Polo Marine.

Would like to know how you view these two companies.

Thanks,
naro

AK71 said...

Hi naro,

Someone asked me this question probably a year or more ago. Otto was rising from the ashes, if I remember correctly, back then.

Marco Polo Marine never did get into the kind of financial tangle which Otto got themselves into. So, I formed the impression that Marco Polo Marine's management are probably more prudent.

I also like the idea that the Cabotage Law in Indonesia gives Marco Polo Marine a natural moat which I hope they would capitalise on more rapidly. It takes time for them to expand their fleet of OSVs.

Otto has a ready fleet which allows them to capitalise on any opportunities rapidly. I don't know very much else. So, that is all I can say. :)

finance4uandme said...

Hi AK,

Thanks for your insights! I think quite a few ship chartering firms are forming JV with partners to work around the cabotage law. I think Otto Marine went into a JV with an Indonesian company in 2013 as it was mentioned in their 2013 annual report.

I personally like how Otto Marine managed to build up its ship chartering revenue, which I think started around 2007. I think its almost 50% of their revenue stream in FY2013. This will form the basis of their recurring income and help it to tide through the offshore segments' cycle.

Thanks,
naro

AK71 said...

Hi naro,

Thank you for sharing your insights.

Yes, it is true that OSV builders and owners have been forming JVs with Indonesian companies to comply with the Cabotage Law.

Recently in August, Nam Cheong and Marco Polo Marine also went into a JV.

"Mainboard-listed firms Marco Polo Marine Ltd and Nam Cheong Limited have formed a joint venture company following the sale of Marco Polo Marine Group’s 50% stake in Marco Polo Offshore (IV) Pte Ltd (the “JV Co”) to Nam Cheong Group..."

AK71 said...

From my FB wall:

Raymond Ng: Marco Polo Marine - One of the best proxies to the booming oil & gas sector in Indonesia

DBS Equity Research: Wired Daily 24 Sep 2014

For SGX-listed stock in this month’s ASEAN Small Mid Caps Radar, we feature Marco Polo Marine. Marco Polo is one of the best proxies to the booming oil & gas sector in the protected Indonesia market, through its 49%-owned listed entity – PT Pelayaran Nasional Bina Buana Raya (BBR). It has two business segments: 1) Ship charting - owns c.50 pairs of tugs & barges and nine OSVs; and 2) Shipbuilding - capable of handling shipbuilding, repair and conversion jobs.

Trading at a historical low P/BV of 0.7x, the tide could be turning for Marco Polo against the backdrop of:
1) earnings recovery as things start to get moving post-election in Indonesia;
2) strong organic growth from delivery of seven OSVs;
3) securing a strategic partner to grow its new jackup rig business; and
4) clinching its first rig charter contract.

These should drive the company’s share price closer to its FY15E book value of 52 Scents on the back of a 10% ROE.

ozxinvest said...

More collaboration from Nam Cheong. A prelude to the larger rig business? Possible candidate?

AK71 said...

Hi ozxinvest,

Apart from the weakness in its tugs and barges business in recent months, Marco Polo Marine's track record has been quite good. So, I am hopeful that things would indeed pan out as planned. :)

LCL said...

Hi AK

Whats your view on the JV between Nam cheong and Marco polo? More gain for Nam cheong?

LCL said...

Hi AK

Wondering if you have vested in Nam Cheong? If no, Why?

AK71 said...

Hi LCL,

I was thinking about possibly doing a blog post on this but I am feeling a little under the weather tonight and decided to take a break.

Anyway, I think it is a win win situation. Nam Cheong gains access to Indonesian waters and Marco Polo Marine benefits from being able to meet market demand more rapidly without spreading its financial resources thin. That is it in a nutshell, really.

Your question on why I am not vested in Nam Cheong has been asked before. I just wasn't sure about their business strategy which was to build even before orders were received.

This strategy is rather risky, I thought, but I suppose Nam Cheong caught the wave of rising demand very nicely. Not the first time I missed a boat (pardon the pun). ;)

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