$100,000 lesson from Marco Polo Marine.

I always say that I have been mostly lucky as an investor. The operative word is "mostly".

Long time readers would remember the narrative for Marco Polo Marine, a business which transformed from a tugs and barges operator, it was doing all the right things to grow stronger, adding value over the years. 

In fact, Marco Polo Marine weathered the Global Financial Crisis well and remained profitable even through bad times. That says something about their management.




When I decided to invest in Marco Polo Marine, I noticed persistent insider buying a few years ago and their prospects were good. They started to pay meaningful dividends too. 

It was likely that, conditions permitting, dividends would continue as the founding family had a 60% stake in the business and they still do.

So, what went wrong?

Marco Polo Marine is in a cyclical industry and in a cyclical industry, we have to expect down cycles. They managed to survive previous down cycles because they were more conservative. 

That is a lesson from this episode.




Any company in a cyclical industry might want to be more conservative because we don't know when things might go down and for how long they might stay in the doldrums. Trying to do too much with a weak balance sheet could be dangerous.

I have said before that if a highly geared business has strong cash flow, then, it could cope with its debt. Yes, it is about having a healthy interest cover ratio. This was from 2015:

This was why I avoided the likes of Otto Marine although some of us might remember how there were write ups on how they changed their business model and things could become better. It was all too speculative for me. 

I didn't buy into Nam Cheong as well because they were building vessels in anticipation of buyers which looked smart during good times. 




Swiber, I avoided and I probably blogged or talked about avoiding their bonds too.

Comparatively, Marco Polo Marine, to me, was a safer investment although it was a smaller business. 

Unfortunately, when bad times strike, cash flow could dry up, especially when the bad times have lasted as long as they have for the O&G businesses. This dry spell has been the worst and the longest for the industry.




I am not writing off Marco Polo Marine yet because it is not over until it is over. However, although they are not a Swiber, there is a chance that Marco Polo Marine might suffer the same fate. If that should come to pass, I will have to write off what was once upon a time a $100,000 investment.

Related post:
Cutting or holding MPM?

Position sizing and emotional well being.

AK 

Marco Polo ... hit new Low.

Sighz. I have too much oil and gas in my portfolio. 

AK said:
"If it is causing you distress, you are probably overexposed..."

hi AK,

i didn know marco polo has so high debt . do u think marco polo will go into bankcrupt?

serious, i need your advice. if you have sold it, just let me know.

i really want to keep my remaning capital.

has losing a lot from peak 37 cent. 

Thank you!

AK said:
"I am still holding my position in MPM.
I don't know if MPM will go bankrupt.
The possibility exists, of course."

All readers who feel the same way, please read related posts below.

Related posts:

1. MPM: My comment in another blog.

2. Cutting or holding Marco Polo Marine?

3. How to have peace of mind as an investor?

Cutting or holding Marco Polo Marine?

Dear AK

Good day to you!

MPM has been on serious "diarrhoea" mode for a long time.  Friends have advised that I should cut-loss and forget about this counter.

I would appreciate it if you could talk to yourself on MPM.

Thank you.

Regards

AK says:
"MPM has survived previous down cycles before. I am hopeful that they will survive this time too.

"The elder Lee now holds 62% of MPM's stocks. He wouldn't want MPM to go under.

"I am holding on to my investment, understanding that, for a while now and for a while more, this position is rather speculative."

Related post:
Marco Polo Marine: Termination of rig contract.

Marco Polo Marine: Termination of rig construction contract.

It has been more than a year since I blogged about how I managed my exposure to Marco Polo Marine. 

I believe that it is a good example of how we could size our investments not only based on our motivations and whether the investments meet those motivations. It is also a good example of what we could do if the investments' ability to meet our motivations should change over time.

Marco Polo Marine had a very good track record even through the Global Financial Crisis a few years ago. I was also impressed by their foresight to move into the business of OSVs and not just stick to tugs and barges. Things were looking good and they started paying dividends. 

To me, as an investment, Marco Polo Marine provided a nice combination of growth and income.

Without a working crystal ball, I definitely did not see an order for a jack up rig coming. It was a huge commitment and this is probably putting it rather mildly. Of course, if things were to pan out nicely, Marco Polo Marine would probably do even better to have an asset like a modern jack up rig which would bring their business to the next level.

However, I decided that the deal introduced a certain amount of speculation. I also decided that it would be difficult for Marco Polo Marine to continue paying a meaningful dividend with a heightened borrowing level. So, based on the way I allocate my resources, it would require that I thin my exposure to Marco Polo Marine and I did.

Of course, for a while now, we know that things did not pan out nicely, with the price of crude oil having plunged quite suddenly and plunged badly too. 

It does not look like things are going to improve until global demand rises enough to address the current oversupply of crude oil. Although the Cabotage Law in Indonesia will expand to cover jack-up rigs as well in the new year, there is no guarantee that Marco Polo Marine would benefit from it in such an environment. 

I still have a position in Marco Polo Marine and I actually added to this position in recent months as the stock price declined but only to a level at which I feel comfortable with a more speculative position. 

Now, with the news that Marco Polo Marine has terminated the contract with PPL Shipyard for the construction of the jack-up rig, what do I think?

The reason given for the termination is PPL Shipyard's "failure to comply with certain of its material contractual obligations". I believe it had to do with some quality issues found with the rig that is still under construction.

Apart from terminating the contract, Marco Polo Marine is also going to try and take back the 10% deposit it paid for the rig. Will they be successful? I don't know.

I do know that without the rig in the picture, Marco Polo Marine's balance sheet would be stronger. Their profit would also be higher. Yes, despite what some might think, Marco Polo Marine is still a profitable company.

In an environment of prolonged low crude oil prices, the rig order cancellation is probably more of a good thing, realistically. Of course, with the speculative overhang removed, how is Mr. Market going to treat Marco Polo Marine's stock? 

Sell? Buy? Hold? You tell me.

Marco Polo Marine's NAV per share is 52.8c and their EPS (9M FY2015) is 3.42c. 

4Q FY2015's results should be out soon and if we were to assume zero earnings in that quarter, at 19c a share, we have a PE ratio of 5.56x.

With the rig order cancelled and if there are no severe ramifications because of this, I think that Marco Polo Marine should eventually shake off the more speculative air that surrounds it as an investment.

See announcement: here.

Related post:
Managing exposure in investment portfolio.

Marco Polo Marine: My comment in another blog.

I stumbled upon a blog on Marco Polo Marine and I was reading the comments section and felt compelled to make a comment to correct one of the readers. This was my comment:

For readers who are interested in the blog I am referring to, you might want to follow the link here to read the rather well written article: Valuestocks.sg: Marco Polo Marine - Still waiting.

For readers who just want to know what could have compelled me to make the above comment, this was the comment responsible for my response:

It seems that AK the blogger has been gravely misunderstood. It is either that or I have misunderstood what I should be doing as a blogger or whether I should be blogging at all.

Some time off from blogging to do some serious thinking is probably in order.

Related posts:
1. Portfolio review: Unexpectedly eventful.
2. Managing exposures in AK's portfolio.
3. The matter of letters and FY 2014.

Marco Polo Marine: The matter of letters and FY2014.

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.

See:
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.

SembCorp Marine: A nibble.

Shareholders of Marco Polo Marine would remember that they ordered an oil rig from SembCorp Marine earlier this year. The value of the contract was about US$214 million. That is a lot of money. SembCorp Marine is a leader in the building of oil rigs, of course, and they have an impressive order book.

That led me to wonder if it might be a good idea to be a shareholder of SembCorp Marine too and benefit from Marco Polo Marine's purchase of the oil rig. Yes, I know. I am so greedy. Bad AK, bad AK!

SembCorp Marine was trading at about $4 to $4.20 a share back in February. The stock price was in a downtrend. (It still is.) Support was at around $3.90. The moving averages were all descending and the momentum oscillators were not supportive. (They still aren't.) So, there was a good chance that prices could go lower.

The many times tested support at $3.90 gave way eventually and, this morning, stock price hit a low of $3.54 a share. The CMF hinted that selling pressure has reduced. It could be that some short positions were being covered and it could be because this is the last trading day of the week.

Ahead of a long weekend, short sellers might think it safer to close their positions. Selling could resume next week or it might not. So, with share price more than 10% lower than it was in February, I wondered if I should wait a bit more or buy this morning?

I took a look at some numbers:

From a valuation perspective, the stock is more reasonably priced now. In April 2011, when it touched a high of $6 a share, it was trading at a PE ratio of 16.66x. Pretty high. Mr Market obviously expected better earnings to come but better earnings did not come.

Today, share price touched a low of $3.54 in the morning. At that price, assuming an EPS of 24c, annualising 1H 2014's figures, we are looking at a PE ratio of 14.75x. This would seem like a fairer valuation although still not cheap.

If we believe that oil is still going to be an important energy source in the world and if we believe that any weakness in oil prices is temporary, then, weakness in the share prices of rig builders with good track records like SembCorp Marine presents an opportunity to get in at more reasonable valuations.

As I like to be paid while I wait, I looked at the dividend payout record of SembCorp Marine:

It seems to me that SembCorp Marine normally pays out about 50% of their earnings as dividends to shareholders and more during good years with better earnings. An 11c to 13c DPS would mean a dividend yield of 3.1% to 3.67%, given an entry price of $3.54 a share. As an investment for growth and income, I feel that this is pretty decent.

So, although a PE ratio of 14.75x  does not look cheap, I decided to initiate a long position this morning at $3.56 a share. A nibble, so to speak. Didn't throw in too much and definitely not the kitchen sink. Continuing weakness could see gap cover happening at $3.30 and for people who believe that gaps will eventually be covered, it could be worth waiting a bit more.

What would I do if price should test $3.30? I would probably be buying more.

Related post:
Marco Polo Marine: Drilling for higher income.

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

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.

Managing exposure in AK's investment portfolio: Examples.

I received a few emails and comments both in my blog and on my FB wall regarding Yongnam and Marco Polo Marine. In the wake of their dismal results, some are wondering if they should stay invested. Of course, I won't tell people what they should do but I can share with them how I manage my portfolio so that I do not lose sleep over it.

 

Regular readers and attendees of InvestX Congress a couple of months ago might remember the graphic of a pyramid which I shared. In case you do not remember, it is found in this blog post: Motivations and methods in investing.

Many know that I invest primarily for income and these investments form part of the wider base of the pyramid. It is about investing for a predictable and, ideally, sustainable flow of income. Such investments provide my portfolio with a measure of stability that I desire.

I also invest for income and growth. This is about investing in companies which have the potential to grow and have shown some promise through their track records. On top of this, I like for them to show a commitment to pay dividends. Of course, I said before that both Yongnam and Marco Polo Marine were in this category.

I also invest purely for growth but this is higher up in the pyramid and such investments, without any dividends, should form a smaller portion of my portfolio.

So, for example, I reduced my exposure to Marco Polo Marine as it would probably struggle to pay a dividend now because not all its businesses are doing well but I am still optimistic that the company would see impressive growth if the purchase of the oil rig should work out the way the CEO thinks it should.

Now, what about Yongnam? They announced a bigger loss than expected in its latest results. A question to ask is whether this weakness is enduring or is it temporary? I am inclined to believe that it is temporary. So, I am staying invested.

With Yongnam, it is about securing more projects and, hopefully, those with higher margins. Although I am optimistic that Yongnam will do better in future, in the near term, the thesis for investing in Yongnam for both income and growth has been shaken. So, I might reduce exposure, similar to what I did with my investment in Marco Polo Marine.

Now, some might ask if I would lose money by reducing exposure. I might.

Might? Yes, might, not would.

It is good to remember that in all my investment decisions, it is partly about getting in with a margin of safety. Of course, with trading decisions, it could be quite different.

Also, because I usually invest with an income angle in mind, losses, if any, are less daunting, taking past dividends into consideration.

If I had divested some of my investments when stock prices ran up, then, I could actually end up with a gain even if I were to reduce my remaining long positions at a loss later on. I did this for Yongnam before but, unfortunately, I did not do so for Marco Polo Marine. Why?

Yongnam's share price ran up because of speculation regarding its chances of getting that big job in Myanmar. Marco Polo Marine's share price ran up, I believe, because it was undervalued compared to its peers. So, a partial divestment in Yongnam's case when prices ran up was only reasonable to me but not in Marco Polo Marine's case.

We don't always do well in our investments as conditions change and these changes might throw a spanner or a few in our analyses. However, if we

1. Invest cautiously, always demanding a margin of safety,

2. Take some gains off the table when given the opportunity,

3. Stay invested if the investment still holds promise,

Over time, we won't do too badly.

Finally, it probably pays for some to remember that my investments in Marco Polo Marine and Yongnam are bits of a bigger investment portfolio. They are not my only investments. Remember the pyramid. Know what we are after and our methods should reflect our motivations.

Related posts:
1. Yongnam: DPS of 0.6c.
2. Marco Polo Marine: Reason for weakness.
3. Portfolio review: Unexpectedly eventful.

Invest X Congress: Q&A.

A feedback which I received from readers is that they wished I had given them some Q&A time after my presentation. I ran out of time and I think I took some of Rusmin's time too. My bad.


Courtesy of Audrey S. who had one of the front row seats.

Well, good thing I have a blog, right? I received quite a few emails, comments and PMs from old and new readers (mostly old as I think the new ones are still too shy) after the event and you might want to think of this blog post as the Q&A session that we didn't have time for at the event:

Q1. On the importance of an emergency fund.

A1. I said that it is important to have an emergency fund that will cover at least a year or two of living expenses and that if people who were at the event didn't have an emergency fund, they should go home and build an emergency fund first and not be investing now. If the economy should go into a recession, chances are the stock market would see prices tumbling too.

Now, imagine if we should be jobless but did not have an emergency fund. We might be forced to liquidate our investments at low prices. Not a pretty picture, is it? This is especially so when that should be the time to pick up good bargains offered by Mr. Market. It would be quite depressing.

Have an emergency fund and also a war chest. Two different funds. Not to be confused with each other.

Q2. On tipping AK.

A2. In the early days, I used to have a tip button in my blog. I installed it after seeing some bloggers having one in their blogs. I removed it after receiving that $100 tip I spoke about at the event. I don't want to feel obligated to anyone to provide advice because I receive tips from them.

I am not allowed to give advice, anyway. So, that was when I started saying I am only talking to myself in my blog. People who eavesdrop do so at their own risk. ;p

Q3. On income producing assets.

A3. Stocks, bonds and real estate. Actually, there are some very interesting assets which people invest in for income. I read that people actually invest in parking lots as well as taxis in Hong Kong to generate passive income, for examples. We can also find business trusts in Singapore which invest in assets such as infrastructure, ships, ports and cable television network.

No matter what assets we decide to invest in, if it should be for income, we want to be clear that the income is generated by the assets and we want to be sure that income distributions are sustainable. The time period could vary. The reason why I sold my investment in PCRT was because I decided that the income distributions were unsustainable.

Q4. On pyramids and percentages.

A4. I spent quite a bit of time talking about the graphic that looked like a pyramid because I felt that it is something important that income investors like myself should have in mind. Being able to compartmentalise investments is helpful in guiding our behaviour towards each investment, actual or potential. The question which I have been asked has to do with percentages since I mentioned that I would not have more than 2 or 3% of my money at the top of the pyramid which represents "aggressive" or "speculative" positions. So, what about the other layers in the pyramid? What are the percentages? I would say that it depends on the individual and his motivations.

Like I said during my presentation, if he is more of a speculator, then, the graphic for him could be an inverted pyramid. For someone who is more into growth stocks but who still believe in having plenty of cash to take advantage of opportunities, then, his graphic could look like an hourglass. Remember the population pyramids we learned in Geography classes in secondary school? You get the idea.

Q5. On Marco Polo Marine.

A5. I had an investment thesis. A sound one too, I believe. If all things had remained the same, the thesis would still be valid today. Of course, things changed over time and with only a schizophrenic bowling ball, I was not able to see the changes before they happened.

For anything positive that has a greater degree of predictability or certainty, I would allow a greater exposure to it in my portfolio. If there is a stronger element of uncertainty, then, I would trim my exposure. It is one way I manage risk. So, this was why I moved my investment in Marco Polo Marine from the "growth and income" section of my pyramid upwards to the narrower "growth" section. We could even suggest that it has a speculative element with its purchase of a jack up rig scheduled for delivery in December 2015. So, logically, it had to become a smaller investment for me.

Q6. On Starbucks, Bangkok and bras.

A6. I was told by a female reader who flashed the "V" sign at me that she was not flashing a victory sign at all. I misunderstood her. She was trying to tell me that I made an inappropriate comment about saving money. Which comment was that?

I made a joke about using money saved from not buying Starbucks coffee to fly to Bangkok to buy cheap and good bras. To all the ladies who were wounded by this joke which was apparently in very bad taste, my most sincere apology.

You can tell that I am truly remorseful because I have not sent out an email to the media stating that I had sacrificed myself to raise awareness of how we could save money and how ladies could use the money saved to buy cheap bras in Bangkok to save more money. Sounds Royt? ;p

Q7. On CMT.

A7. CMT is very well run. There is no question about it. At $1.97 per unit, we are looking at an annualised yield of 5.2%. It is also trading at a premium of 15% to its NAV of $1.71. "I would sooner buy a great business at a fair price than a fair business at a great price." Warren Buffett. To me, buying REITs is almost like buying real estate. I won't want to pay more than the NAV. At NAV, perhaps, it would be good to get some, everything else remaining the same.

Finally, if you went for the event and if you want to find out about the stuff that I could have shared if I had more time, contact me to ask for my presentation slides. I will tell you how to get the slides. Then, use the slides as a guide and search for the relevant blog posts in my blog. It will probably be similar to reading an e-book but with a bit more work required on your part. ;p

More Q&A found in the comments section of this related post: Invest X Congress: Closing thoughts.

Portfolio review: Unexpectedly eventful.

At the end of last year, I shared the results of my efforts in the stock market and also my strategy to grow wealth and augment income in the new year. Quite a few things have happened since then. So, I decided to do a review of how things have moved.

In the S-REITs department, the biggest change this year to my portfolio has to be the major divestment in Sabana REIT. My current long position in the REIT is just a bit more than 10% of my investment at its largest. Whatever I have left is free of cost and will continue to generate passive income although on a much smaller scale.

Also in the S-REITs department, I took part in AIMS AMP Capital Industrial REIT's rights issue and tried to get more excess rights but without much success. Recently, I sold a small percentage of my investment, believing that it was the right thing to do as its unit price ran up, post rights. This REIT is still my largest investment in S-REITs. Having said this, passive income received from this REIT will shrink some 15% this year, given the dilution from the recent rights issue.

In the Business Trusts department, I decided to divest completely my investment in Perennial China Retail Trust after receiving another round of income distribution which I concluded was unsustainable. This was before the takeover offer by St. James.

Also in the Business Trusts department, in late January, I more than doubled my investment in Croesus Retail Trust, believing that, trading at a discount to valuation and offering an attractive income distribution, it is a more dependable passive income generator than Perennial China Retail Trust. Although its relatively high level of gearing is a concern for some, there is unlikely to be any nasty surprises in the area of financing over the next few years.

In other stocks, I added to my long positions in Yongnam and Hock Lian Seng. Yongnam hit a rough patch, as expected. However, things are likely to improve later this year and probably the next. It is a leader in what it does and it has a very good track record. Last year's performance was exceptionally bad and probably would not be repeated. I like how Yongnam started to pay meaningful dividends in recent years and this is likely to continue, conditions permitting.

Hock Lian Seng, like Yongnam, is in the construction sector and also like Yongnam, I expect it to be a beneficiary of increased spending on infrastructure projects in the country. Already, Hock Lian Seng won two major projects which have bumped up its order book and will provide earnings visibility for some time to come. There will probably be more order wins in future. Of course, Hock Lian Seng also pays meaningful dividends which I like.

One stock which I have been waiting for an opportunity to accumulate was CapitaMalls Asia. Well, it is a pity that it will be taken private by its parent, CapitaLand, which offered $2.22 a share. I feel that it is a fair enough price which, perhaps, suggests that the price at IPO was unfair but I will let readers draw their own conclusions in this contentious issue. My acceptance form has been sent out.

A stock which I have turned more cautious on is Marco Polo Marine. Recent developments mean that the business is now somewhat different from what I envisioned it to be in my initial investment thesis. Not giving enough consideration to how the tugs and barges could be a drag on overall performance before, I decided to trim my exposure to the stock. Things could improve in future but, for now, the level of clarity has lowered.

The first few months of the year have turned out to be a bit more eventful than expected on the investment front. My war chest is now fuller through some divestments as well as dividends received. I do not have any immediate plans for the funds and I will probably just hold on to them for now. After all, I had felt that I was too much invested in the stock market and had desired a bigger cash position.

Of course, if I were to keep the status quo, I will, for sure, receive a much lower level of income from my investments in S-REITs this year. How much lower? I guess we will know by end of the year.

Having said this, my decision to increase my level of investment in SPH and NeraTel last year so that my overall portfolio is less reliant on S-REITs for passive income was pre-emptive. Enlarging investments in Hock Lian Seng and Croesus Retail Trust earlier this year has also helped to reduce reliance on S-REITs for passive income.

What next? I certainly do not know if the economy will do well or if it would suffer a decline in the next few years. However, I do know that I am staying invested as long as my investments have reasonably sturdy fundamentals and, preferably, are able to generate reasonably good income for me. They don't have to be stellar performers and I don't have a problem with getting rich slowly.

I will simply wait for Mr. Market to feel depressed enough to sell more to me at prices I cannot refuse while I collect regular dividends in the meantime.

Related posts:
1. A strategy to grow wealth and augment income.
2. Sabana REIT: 1Q 2014 DPU 1.88c.
3. AIMS AMP Capital Industrial REIT: $1.425.
4. Perennial China Retail Trust: Fully divested.
5. Croesus Retail Trust: DPU above forecast.
6. Yongnam: DPS of 0.6c.
7. Hock Lian Seng: $221.8 million contract.
8. CapitaMalls Asia: Farewell.
9. Marco Polo Marine: Price weakness.
10. SPH: Within expectations.
11. NeraTel: A very good investment.

Marco Polo Marine: Reason for price weakness.

Yesterday, a couple of readers asked me what could be wrong with Marco Polo Marine since the share price declined. A reader also asked me where the next support could be, using technical analysis. Last night, I checked if there were any announcements from the company and found a plausible reason for the recent weakness in share price.

We know that Marco Polo Marine has an Indonesian subsidiary, PT Pelayaran National Bina Buana Raya (BBR). Well, the subsidiary has released 1Q 2014 results and the numbers are very bad. Of course, BBR is not all of Marco Polo Marine's business but it is a significant part. So, I would expect Marco Polo Marine's own quarterly results to be affected. How badly affected would depend on how other business segments perform, of course.

Now, the BBR story:

Over at BBR, revenue reduced by 11% while direct expenses increased almost 20%.

The OSV segment of the business did well as revenue improved some 57.3%. However, Tug and Barge vessels segment of the business saw a reduction in revenue by some 47.5%. (The two segments put together, OSV segment now has a 61.5% share of total revenue.)

OSVs are clearly profitable while Tug and Barge vessels are not. Why? OSVs recorded $4.8 million in revenue and incurred expenses of $2.1 million. However, Tug and Barge vessels recorded $3.18 million in revenue but incurred expenses of $4.37 million! This segment bled massively!

In the same quarter in the preceding year, the Tug and Barge vessels segment of the business turned in a revenue of $5.84 million and incurred expenses of $3.95 million. This suggests to me that the expenses incurred by this segment has been quite consistent but the revenue drop, year on year, is astounding!

If this were to continue, BBR would be better off without the Tug and Barge vessels segment of the business. Gross profit declined a massive 62.5%. Operating income declined by 73.5%. After financial charges and income tax, total comprehensive income reduced by 92.1% for the quarter, year on year!

How does this affect my investment thesis?

With the decision to gear up significantly to purchase a jack up rig which could potentially double earnings in FY2016, I was prepared to accept lower earnings in the next two years because of the much higher finance costs resulting from the MTNs although I have to admit that the jack up rig was never a part of my initial investment thesis for Marco Polo Marine.

With the jack up rig and higher finance cost thrown in for the next couple of years, I rationalised that as long as operating income improves steadily over time with more OSVs being added in the same period of time, logically, any decline in earnings due to the higher finance costs could be cushioned. This was an important assumption.

I said that to stay invested in Marco Polo Marine is to believe that:

1. Earnings will improve as more OSVs join the fleet in the next 2 years.

2. The rig delivery by end of 2015 will improve earnings massively.

If well executed, the strategy will catapult earnings upwards, possibly doubling EPS by 2016.

Now, for earnings to improve gradually over time until the jack up rig is delivered by end of 2015, I had focused on the OSV segment of the business as the growth driver. I had simply assumed that the Tug and Barge vessels segment of the business would continue plodding on and that the segment's revenue and expenses would more or less stay constant.

So, for BBR's Tug and Barge vessels segment to turn in a massive loss is a shocker and this has thrown a spanner into my thesis for having a significant investment in Marco Polo Marine.

Does it mean I no longer believe that Marco Polo Marine is on the right track? No. In fact, if not for the decision to focus on growing its fleet of OSVs, BBR would have turned in a loss making quarter instead of one with much lower earnings.
 
Unfortunately, to be realistic, FY 2014's numbers could turn out to be disappointing, everything else remaining equal. This is even if the Tug and Barge vessels segment of BBR's business should see revenue improving and expenses reducing in the next two quarters to what should be the mean.

Lower utilisation of the Tug and Barge vessels in the preceding quarter was put down to seasonal factors (i.e. monsoon period). Expectations of a reversion to the mean did not happen. Is this weakness in the segment temporary or is it going to be more enduring? I am inclined to believe that it is temporary but if a reversion to the mean does not happen in the following quarter, then, the risk of being invested in Marco Polo Marine could be much higher than initially thought.

I am staying invested as I still believe in the growth story but I should move Marco Polo Marine higher up in the pyramid (see related post no. 1 below) from an investment that is for growth and some income to just being an investment for growth. Without the income component, my approach will demand that I trim the size of my investment in the business.

See BBR's 1Q 2014 results: here.

Related posts:
1. Motivations and methods in investing.
2. Marco Polo Marine: Drilling for higher income.

Marco Polo Marine: Drilling for higher income.

I am going to take another trip down memory lane and this time to look at why did I invest in Marco Polo Marine. Then, I will look at the most recent development in the business.

I first invested in Marco Polo Marine in the middle of 2012 when I spotted persistent insider buying. I got in at 31.5c and 32c a share. Since then, I have been accumulating. The highest price I paid was 42c a share and the last time I bought more of its stock was on 24 June 2013 at 37.5c a share.

The combination of a few factors gave me the conviction to make Marco Polo Marine the largest investment in my portfolio:

1. Insider buying.
2. Chairman of the company has close to 60% stake.
3. A relatively consistent ROE of about 15%.
4. Timely emphasis on building a fleet of AHTS vessels.
5. Enforcement of cabotage laws in Indonesia.
6. Relatively cheaper valuation compared to peers.

A complaint I had was that it was moving too slowly and I wished that it would leverage up and buy OSVs to immediately take greater advantage of the higher charter rates in Indonesian waters.

In the current climate, it is hard to buy OSVs at what might be considered good prices and it is not difficult to understand why. So, Marco Polo Marine would rather build OSVs in their own shipyard than to buy from others. However, they did manage to get a good price for MP Prevail last year. I think that shows that the management is rather savvy when it comes to acquisitions.

With their gearing level on the rise, however, I was rather concerned about the strength of their balance sheet but if the business chugs along with the progressive deliveries of the OSVs being built in their shipyard, we should see progressively stronger earnings in the next couple of years, everything else remaining equal.

Of course, we now know that everything else did not remain equal because Marco Polo Marine issued some MTN and decided to buy a jack up rig. This was totally beyond my expectations and it took me a while to digest the news.

My initial reaction was to ask how Marco Polo Marine, a company with a market capitalisation of S$135 million, was going to pay for a US$214 million rig? That was a natural reaction. However, when we think of the S$300 million MTN they have in place, it all makes sense.

Marco Polo Marine drew down S$50 million in MTN in the last quarter and this attracts some S$0.7 million in finance cost every quarter. As they only have to pay 10% of the rig's total bill this year, I have an inkling that they might use the remaining money to pay down debt. They only have to pay another 10% of the rig's total bill by 11 February 2015. The balance 80%, they only pay when they take delivery of the rig in 4Q 2015.

What this means is that we could see lower profit this year. However, if some debt is paid down and if the two 8,080 BHP AHTS vessels are completed on time, we could see the impact lessened. Assuming the status quo, then annualising 1Q 2014's numbers, we could see a 22% reduction in EPS to approximately 4c or so, year on year. This assumption is, of course, unrealistic, and would form my worst case scenario for the company.

The cabotage law in Indonesia will include drilling rigs by December 2015 and to time the delivery of the rig in 4Q 2015 really makes sense. There is no need for a huge capital outlay in the meantime while Marco Polo Marine sees more own built OSVs joining its fleet in the next two years which should improve earnings as the vessels enjoy higher charter rates.

When the time comes to take delivery of the rig, Marco Polo Marine should be financially more robust but it would still need to draw from its S$300 million MTN program to pay for the rig. This is the hard truth but it is good to know that financing is in place.

Chances are high that Marco Polo Marine will be able to secure a contract for the rig a few months before they take delivery of it. Chances are also high they will be able to get pretty good rates as there is a lack of such high specs rigs in Indonesia and, of course, the enforcement of cabotage law in the country for rigs by then tilts the scales in Marco Polo Marine's favour.

Now, how significant an income contributor could the rig be?

According to AM Fraser, the Pacific Class 400 jack up rig which Marco Polo Marine ordered commands a day rate of some US$ 160,000 in Thailand. With the cabotage law in Indonesia, the rate could be higher when Marco Polo Marine takes delivery of their rig end of next year. I know that AHTS vessels enjoy a 20 to 30% premium in Indonesian waters. Could we expect the same kind of premium for rigs come December 2015?

If we were to do some quick mental sums, we would be able to conclude that this is probably going to be a very good investment. Simplistically, just putting the rig to work 11 months in a year could bring in some serious money without factoring in any possible premium. In such an instance, the return on the investment would quite easily exceed the 5.75% coupon payable on the MTN.

So, my assessment of this latest development is that it will lead to some short term earnings depression due to higher finance costs but it is not going to cause the company any distress. By 2H 2014, things would start to look up and by 2015, with more AHTS vessels in its fleet, enjoying higher charter rates, earnings would look even better. Then, when the rig is delivered by end of 2015, we should see a big boost to earnings, if everything goes as planned.

Do we share Sean Lee's vision and are we able to take the same leap of faith? Or do we think he has a few loose screws in his head?

Related posts:
1. Marco Polo Marine: Exciting times ahead.
2. Marco Polo Marine, Mermaid Maritime and Jaya Holdings.

Marco Polo Marine, Mermaid Maritime and Jaya Holdings.

Someone asked me recently why didn't I buy into Mermaid Maritime or Jaya Holdings which are in the same industry as Marco Polo Marine?

He suggested that I look stupid now that Marco Polo Marine's share price is still languishing while those of Mermaid Maritime and Jaya Holdings' have shot through the roof.

Well, like I always say, I don't have a working crystal ball, only a working bowling ball and I am not even a very good bowler. Sometimes, my bowling ball ends up in the gutter. OK, ok, frequently, my bowling ball ends up in the gutter. So embarrassing.

Anyway, if you had bought shares of Mermaid Maritime or Jaya Holdings' and made a bundle, congratulations. Celebrate! Always good to make money.

I have said that fundamentals look strong for the offshore and marine industry, supporting buoyant demand in the oil and gas industry. Prospects look good for the next couple of years at least.

I haven't studied Mermaid Maritime or Jaya Holdings in detail but with Mermaid Maritime now trading at about 23x earnings and Jaya Holding's stock price at a 5 year high, Mr. Market has to be very optimistic indeed.

For example, he must be expecting the earnings of the former to at least double in the next 12 months in order for a 23x PER to be reasonable now. Is this possible? I suppose anything is possible. What is the probability? Anyone?

There could be explosive growth in business in the future for both Mermaid Maritime and Jaya Holdings but I cannot tell if it is going to happen. So, I rather prefer to buy cheaply.

If I am able to buy a company's stock at a PER of 8x in the same industry which has earnings growth visibility over the next 18 to 24 months, isn't that a better deal? Well, I think so.

Now, which stock could this be?

Let me ask my bowling ball.

Related posts:
1. Marco Polo Marine: Exciting times ahead.
2. When to BUY, HOLD or SELL?

A strategy to grow wealth and augment income (2013).

I am primarily investing for income and in my last blog post, in what has become a yearly practice, I revealed my full year income from S-REITs as well as how they fit into my investment strategy. They are relevant to income investors but with the spectre of rising interest rates in the years ahead as well as a peaking in the real estate cycle here, it is sensible not to be overly optimistic about S-REITs in general.

So, apart from a large purchase made in Saizen REIT in the middle of 2012, I have devoted most of my resources to stocks. These should be undervalued and are likely to continue growing for years to come. Since I want to have income from my investments, I would also like for these stocks to pay dividends.

Marco Polo Marine's yard in Batam.

Now, with these stocks, the main strategy is to buy and hold. However, I am not averse to trading around my investments. So, I could divest partially or fully if it is a good idea to do so. For 9M 2013, I revealed that I locked in gains of S$188,625.13. Has the number changed?

Well, I mentioned that I partially divested my investment in Sabana REIT last month. This added S$12,860.03 to gains from trading in 2013.

So, total trading gains in 2013 is S$201,485.16.

What about adding to my long positions?

What I hope to do primarily is to identify good companies, initiate long positions in them at fairly good prices and then wait to add to these positions if there should be bad news which send their share prices down. These are companies which I am comfortable to stay invested in for years, knowing that they possess some competitive advantages which differentiate them.

Warren Buffett famously said that we should invest with the thought that the stock market could close the next day and not reopen for five years. What does this mean?

Invest in stocks of companies which we are confident will do better over the next five years. We wouldn't be bothered by any volatility in their stock prices in the meantime unless it is to add to our long positions with greater margins of safety. If we understand this, we will know what stocks to avoid. How? Do an inversion.


With this in mind, in the last three months, I added to my long positions in NeraTel and Yongnam as their share prices declined due to bad news which I believe are neither long term nor recurring in nature. I have received fairly good dividends from these stocks and I also made some money trading these stocks earlier in the year.

I also added to my long position in SPH. I was paid both the special dividend and the year end dividend for this as well.

Marco Polo Marine is still my single largest investment although its share price has not declined significantly enough for me to add to my long position. The much higher dividend per share paid out recently was a bonus.

I also retain long positions in CapitaMalls Asia and Wilmar International. These are strong companies and leaders in their fields. They are likely to do better in future.

So, was anything new added to my portfolio?

I initiated a long position in Croesus Retail Trust and even added to this position by using funds freed from a partial divestment of Sabana REIT.

Wait a minute? Didn't I say that I am wary of rising interest rates and a possible peaking of the real estate cycle? Yes, I did but Croesus Retail Trust owns malls in Japan and the BOJ is bent on keeping interest rates really low. Abenomics demand this. The Trust has a relatively low cost of debt which is locked in for 5 years.

Luz Shinsaibashi.

Japan has also suffered from continual deflation for 20 years. If anything, the real estate cycle should have a greater chance of bottoming than peaking. Anecdotal evidence tells of a recovering real estate market in recent months that is likely to pick up speed in future.

Although my strategy, with a generous dose of luck, has worked well this year, I can only hope that it will continue to work in the new year.

To grow wealth and augment income? Yes, indeed, that is the plan.

Related posts:
1. 2013 full year income from S-REITs.
2. Yongnam: Substantial shareholder increased stake.
3. NeraTel: Added to my long position.
4. Marco Polo Marine: Exciting times ahead.