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Marco Polo Marine: The matter of letters and FY2014.

Tuesday, November 25, 2014

I receive emails from a handful of readers from time to time regarding Marco Polo Marine's share price and some wonder if I am still a shareholder.

Well, I did reduce exposure many months ago and I blogged about my reasons for doing so. Since then, I have held on to my remaining long position and have done practically nothing as I wait to see how things pan out with the purchase of the jack up rig from SembCorp Marine. There should be greater clarity in the next 9 to 15 months.

I received another email from a reader when the share price plunged to an intraday low of 29c a share in the last trading session. The reader was concerned about her ballooning paper loss. Well, although 29c is below my entry prices, I am not concerned about the paper loss. Why? There is nothing we can do with how Mr. Market feels and what prices he might offer on a day to day basis.

I am more concerned with whether the business is doing what I expect it to do. If not, has the situation deteriorated to a point where it is no longer a worthy investment. So, I go back to my reasons for investing in the business and the reasons for the reduction in exposure later on.

Remember that the main attraction for investing in Marco Polo Marine was the rosy outlook for its OSV chartering business and how it was protected by Indonesian Cabotage Laws. I liked its relatively low gearing level and the decision to start rewarding shareholders with meaningful dividends.

Then, later, there was the decision to buy a new jack up rig from SembCorp Marine. This was not in my initial investment thesis. It would increase gearing level and finance cost. Although the terms of the purchase are actually very good, the fact that there is not going to be any income from the rig in the building stage is simple common sense.

So, earnings would be impacted negatively and I said that I would not be surprised if no dividends were to be paid for a while. The framework in asset allocation that I use requires that I reduce my exposure to the stock.

To stay invested was to believe that Marco Polo Marine would continue to grow as a business. To stay invested was to believe that the existing businesses would continue chugging along and that they would have no trouble in servicing the heavier debt burden. Although the tugs and barges business segment underperformed and caused massive losses, Marco Polo Marine is still profitable, overall.

Even though, year on year, EPS has reduced some 54.6% from 6.56 to 2.98 cents, Marco Polo Marine is still growing. NAV per share is now 49.4c. As I expected, no dividend was declared and, I believe, this is prudent, given the big financial commitment that is the jack up rig.

At 29c per share, that is not a price I would sell at unless I should believe that Marco Polo Marine is worth less than that. It is a 41.3% discount to NAV. Imagine knocking off 41.3% in the prices of everything that Marco Polo Marine owns and taking over.

Of course, one could argue that Marco Polo Marine's assets are worth money only if they are utilised and generating earnings. With an EPS of 2.98 cents, at 29c a share, we have a PE ratio of 9.73x. By the standards of their industry, this is not cheap. However, to latch on to this PE ratio is to believe that the business in future will stay very much the same as the last 12 months. This is where a judgement call has to be made.

Given the CEO's foresight in transforming the company from just a tugs and barges owner to becoming an OSV builder and owner, I would like to think that his bold decision to purchase a jack up rig with advanced specifications to be delivered just as Indonesian Cabotage Laws expand to cover such rigs at the end of 2015 is another right move. Of course, only time will tell.

So, what do I do? Give them time.

I am comfortable with holding on to my investment in a business that is still growing but at a slower pace. Investing only for growth and no income in the meantime, I am comfortable with a much smaller long position, following my asset allocation framework that is the pyramid. I am not bothered by the daily movement of prices because, overall, I believe the business to be sound.

Of course, I don't profess to know what readers who followed my decisions and actions might have thought or are thinking. This blog post is simply to share my thought processes and I hope that it is helpful to some people in sorting out their own thoughts.

Marco Polo Marine Full Financial Year ended 30 Sep 14.

Related posts:
1. Marco Polo Marine: A price I would not sell at.
2. Marco Polo Marine: Reason for price weakness.
3. Marco Polo Marine: Drilling for higher income.


adrian said...

Hi AK,

You mentioned about your "framework in asset allocation", do you mind sharing what framework is that and if there's any resources you recommend about reading up on asset allocation?

Thanks and regards,

AK71 said...

Hi Adrian,

In the second last paragraph, you will see the phrase "the pyramid" in green color. Click on this phrase and you will find the blog post in which I talked about the framework that works for me.

Depending on what motivates us, each of us will have our own idea as to what assets are best for us and in what proportions.

Rolf Suey said...

Hi AK,
The oil price is the culprit of the price fall. It is a big picture general sentiments. Nothing much the companies in the sector can do to boost their share price other than focus on company fundamentals. Collaboration with Nam Cheong is also positive. The rig is speculation and they will need to sell it off before it is completed otherwise, very bad news!

The CEO transforming the business! :-) reservations! People in the industry will know. Maybe for now, CEO's wife actress Vivien Hsu can help to market the Rig.

Sillyinvestor said...

The O and G sector has swing from being a darling sector to a 过街老鼠,with the falling oil price and the aplenty supply of rigs.

The Cruz is now bottom up analysis. If things pend well, this company is undervalued, but there is RISK of multiple whammies

Oversupply of OSV will happen in tandem of over supply of rigs, rates will be affected.

The buyer of rig, if BIG if, they back out, will be hell of a mess for macro polo to handle...

No vested interest, irritating only

AK71 said...

Hi Rolf,

I don't think they are going to sell the rig. :)

AK71 said...

Hi Mike,

From what I know, there aren't many such high specs jack up rigs in Indonesia and with the Cabotage Laws expanding to cover these rigs by end of 2015, they could be in short supply.

Anyway, what MPM has to do now is to find a partner to operate the rig and a client to charter it. There is no plan to look for a buyer.

RayNg said...

O&G index down ~17% to 620 from 750 since Jul2014.

Isn't it that one should invest when the particular sector is pessimistic?

SMK said...

Cyclicals are not looking to do well in the next 2 to 3 years. The political situation and oil prices are not supportive. That said, any bargains picked up during this period is going to do very well later on.

But I do an emotional analysis and I feel there is still some distance to go.

Cory said...

This can turn around fast or sink lower with this thurs opec meeting. So I agreed with reduced stake is a prudent decision.

Your fishing line will have to be very long for the rig. Not many people can wait till 2016 to see the fruit while dividends get squeezed.

Rolf Suey said...

Hi AK,

Seems like you have some internal news. Haha. Care to share what they will do with the rigs? Operate themselves?

If they do not sell, they probably will bareboat charter. It's not very different from selling because they still need the same clientele to charter it. In fact it can be more risky than selling unless the charter is long term charter.

Unless they operate rigs like drilling contractors Transocean, Seadrill, Diamond, Nobel etc where they had their own crew, otherwise it is still speculation.

So either they sell or find a bare boat charter contract in time before rig is delivered, otherwise quite risky. The oil price pessimism will puncture the price even if they secure the order.

I think with the CEO's father backing in Indonesia, the likely project/ buyer should comes from Indonesia. I might be wrong, definitely!

What is your take?

Machi said...

Hi AK,

May I know which Brokerage you're using to buy shares?
I understand Standard Chartered has one of the lowest fees, but I read something like the stock does not belong to you?
Therefore was wondering which brokerage would you recommend?

Casey said...

Hi Ak,

As long as the business is sound, consistently producing and increasing income, we should keep them forever.

I like to pick up blue chips when everyone is dumping them. I continually picked up OCBC, SCI, Wilmar, SMM and Keppelland when the prices were depressed, and love seeing temporary paper loss on these counters as it will motivate me to buy even more. Today, I have only SMM which is still sitting in red, the rest all turned black.

To the conservative me, MPM is at good value, however, it seems risky. If I am investing in it, I could be ended up gambling due to:
1. The business outcome is highly sensitive to its management's decision and leadership.
2. I can't see any specific and sustainable competitive technical advantages that the company is building at. Contrary, it followed the macro economy trend, and hence, overly relies on macro economy and lacks resilience.

Do you still think that MPM is still an investor class business? The one which is suitable to own forever? Why?

Thanks very much.

AK71 said...

Hi Rolf,

You will probably find the answers to your questions in my past blog posts and comments on MPM. I am too lazy to repeat. ;)

AK71 said...

Hi Machi,

I don't think it matters which brokerage we use, generally.

What you buy with your SCB trading account is yours. It is just that it is not in your CDP account. :)

AK71 said...

Hi Casey,

If we look at past years' financial statements, MPM managed to do quite well even through the GFC. For a family controlled business, not bad.

They needed to transform from just a tugs and barges owner in order to stay in the game. They did that and things were looking up until the decision to purchase the rig clouded the waters.

Their OSVs are doing well and they are still growing their fleet. Tugs and barges, not doing so well but this is a legacy business and not easy to terminate.

The rig is the unknown for now. From my research, I do know that such rigs with better specs are in demand in Indonesia. I also know that the Cabotage Law will expand to cover such rigs at about the time MPM is to take delivery of the rig from SembCorp Marine.

I don't think MPM is a buy and hold forever kind of business at this point in time. Investing in MPM is probably taking a calculated risk, accepting a lower growth rate while waiting for a positive catalyst.

Machi said...

Hi Ak,

Thanks for the info, that's the confusing part about the CDP account. What are the pros or cons of not having the shares in my CDP account?

AK71 said...

Hi Machi,

It doesn't matter to me, really. I have two trading accounts. One is similar to what SCB is offering. Unless we expect SCB to go belly up, there is no reason to be concerned. :)

ozxinvest said...

Hi AK,

I don't think you are lazy. I think you are extremely patience and helpful, at the same time, extremely polite.

AK71 said...

Hi ozxinvest,

Oh, dear. Now, I might have trouble exiting my room. Head swelling. ;p

Thank you for the kind words. :)

Machi said...

Thanks AK!!

Zaanan said...

Hi AK, any thoughts on the share buy-backs by MPM recently?

AK71 said...

Hi Zaanan,

I was actually hoping for the share price to decline, hopefully, to the 24c or 25c level to buy more. The share buy backs have created a support in the 29c to 30c region. So, I guess I am not happy. LOL. ;p

Depending on how we do our valuations, 30c is either cheap, fair or expensive. Well, from my recent blog posts on MPM, you know what I think. :)

Gark said...

Not a good time for OnG especially OSV segment.. as the low oil price will result in less capex which means less E&P projects. The first to get hit will be the OSV and jack up rigs which is this company's primary revenue earner.

AK71 said...

Hi Gark,

Yes, I would take a wait and see attitude instead of increasing my investment now unless Mr. Market should offer me prices I cannot refuse. ;)

Clueless Punter said...

I think everyone knows by now about how the outlook for O&G in general is terrible globally. That is the macro picture and is one of the main reasons for the sinking share price (besides tugs/barges etc).

But the angle I am thinking about is how MPM is mostly involved with the Indonesian market, and as such, Micro level developments might be more relevant (Indo domestic supply cannot meet domestic demand and will lean to service domestic demand rather than export markets since prices are low, regulatory/investment hurdles are cleared now for existing sites with low/no productivity, E&P in deepwater/underexplored areas will be relevant to replace aging fields for future supply).

So there are several themes out there that might support activity in Indonesia although they all centre on one crucial theme: domestic supply cannot meet domestic demand growth.

What do you guys think?

AK71 said...

Hi Clueless Punter,

My thoughts are along the same line. :)

It is just like how people think that solutions which work in one part of the world should work in other parts too but this might not be true. Each region could be quite different.

In Indonesia, the Cabotage Laws are what make the O&G sector different from the rest of the world. Of course, there are ways of getting around to complying and these invariably involve local players.

I keep saying that we will know by end of next year if MPM will do better. People who do not have patience should avoid investing in MPM. ;p

AK71 said...

Marco Polo Marine’s (MPM) FY14 core PATMI was SGD11.5m (-30% YoY), beating our forecast by 8% as 4QFY14 (Sep) rebounded strongly QoQ. With the stock trading at three-fifths of book value, we believe that concerns over the weak tugs-and-barges (T&B) segment are more than fully priced in, as MPM’s other three divisions – offshore support vessels (OSVs), shipbuilding and repairs – remained healthily profitable.

MPM and its subsidiary PT Bina Buana Raya (BBRM IJ, NR) today operate a fleet of nine OSVs. A total of 13 new OSVs will join the fleet (we estimate four for MPM, nine for BBRM, see Figure 3) in FY15-16 from MPM and Nam Cheong (NCL SP, BUY, TP SGD0.61), potentially driving FY15 growth and a third of FY16 growth.

The rig will be delivered in Nov 2015, we believe that the signing of a rig contract will be a key revaluation catalyst in the next six months.

MPM’s focus on shallow-water OSVs in cabotage-protected Indonesia shields it from oil price volatility. In addition, cabotage for jack-up rigs will kick in from Jan 2016, right after MPM takes delivery of its first rig.

OSK-DMG, 1 Dec 14.

ozxinvest said...

I think the DMG OSK analyst has done a good job in following up MPM through the yrs, unlike some other analysts who just come and go with the tides. The latest report has details on the fleets and comprehensive additional notes on the financial report which I think long term SHH here should try to read themselves instead of depending AK to spoon feed, and decide whether to sell or hold or to buy more within your means.

If you cannot form your own opinions by reading and researching on your own, cannot withstand paper or realised loss, cannot take responsibility for your own actions and do not know your own limits and needs, you cannot learn to be a good investor and you will be destined to lose money in the market.

And please don't ask for the link to the full report, googling is one of the basic tools in investing.

Capricon said...


AK71 said...

Hi Capricon,

Thanks for the update. Good news. ;)

Capricon said...

Since you are semi retired, you probably could find time to attend the AGM at end of the month, may be can check out their plans for the rig. Time really flies, the rig is due for delivery in Nov-2015 as stated in the annual report.

May be not a good time as oil price is going downhill.


AK71 said...

Hi Capricon,

I will have to see if I am otherwise occupied then. For now, I will wait patiently to see how things pan out with regards to the jack up rig.

I believe that the Indonesian cabotage law that will take effect in 2016 will be advantageous in MPM's efforts to find a client to rent the jack up rig. So, I am not overly worried at this point in time.


Hi AK,

In the recent report by OSK DMG on 6th January, the following was mentioned in their paper.

Marco Polo Marine secured multi-year contracts worth >USD46m for six
vessels. Maintain BUY and SGD0.60 TP (114.3% upside). The first is a
USD27m AWB contract, followed by a maiden AHTS contract in Vietnam
(USD4m) and four vessel charters (>USD15m). These contracts provide
long-term earnings and cash flow visibility. Valuations are compelling
at 2-6x FY15-17F P/Es and 0.5x P/BV for a profitable company.

Sounds like positive catalysts to me, not to mention to very yummy rig at the end of the year, if all goes well. Looks like our patience could be well rewarded.

AK71 said...

Hi Solidcore,

Based on past performance, I think the management are competent. They know what they are doing.

When we invest in a company, we are basically placing our trust in the management of the company too.

Having said this, there will always be events which are beyond the control of the management. So, it is up to us to decide whether we are able to accept the level of risk that comes with the investment. :)

Wei Xiong How said...

OMG ak! Is this a very bad news?!

SINGAPORE - Marco Polo Marine has unilaterally terminated a rig building order worth US$214.3 million (S$306.1 million) from a subsidiary of Sembcorp Marine.
In a statement on Nov 17, Marco Polo said it issued PPL on the same day a notice of termination following the "latter's failure to comply with certain of its material contractual obligations".

"In arriving at this decision to terminate the rig construction contract, MP Drilling has taken into account various factors including cracks found on all three legs of the new rig during two rounds of tests, notwithstanding repair works carried out by PPL after the first round of tests."

Under the circumstances, Marco Polo said MP Drilling will not be taking delivery of the rig and it will be seeking a refund from PPL of the initial amount of 10 per cent of the contract price - about US$21.4 million - paid earlier.

The termination could potentially set up a legal tussle with Sembmarine and comes amid a severe downturn in the offshore industry.

AK71 said...

Hi Wei Xiong,

I don't think it is very bad news, actually.

If the rig is now a bad idea, then, terminating the order is actually a good idea. :)

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