Marco Polo Marine: Exciting times ahead!

Today, Marco Polo Marine's share price rose significantly on the back of much higher volume and the recent visit by a group of investors to the company's yard in Batam could have something to do with it:

Last week, we brought a group of investors to MPM’s Batam yard. We saw all three drydocks busy with repair operations, and the construction of a third-party 8,000bhp AHTS vessel and two similar vessels for its own fleet. In preparation for better shipbuilding times, a new slipway is almost complete. Investors were most interested in the company’s 20% net margins.

 

 

MPM and associate PT BBR are on the cusp of renewing their AHTS charters, with current contracts expiring in September to November. With AHTS supply still trailing far demand in Indonesia, we are highly confident that each vessel will be re-chartered immediately at prevailing market rates, which are 33% higher.

Source: OSK-DMG, 25 Sep 2013

 Good things come to those who wait.

Related post:
Marco Polo Marine: Will FY2013 better FY2012?

Marco Polo Marine: Employee Share Option Scheme.

One reason why I like Marco Polo Marine is the large stake which Mr. Lee Wan Tang has in the company. If insiders have a large stake, their interests are more likely to be aligned with those of minority shareholders'. Any action to hurt the interests of minority shareholders' will likely hurt their own.

I also like the fact that Mr. Lee Wan Tang's son, Mr. Sean Lee Yun Feng, who is also the CEO, and daughter were granted share options on 24 April 2013 with an exercise price of 41.5c. 30% of the share options are allowed to be exercised on the 1st anniversary of the date of grant, not earlier.

Anyway, it is unlikely that anyone would exercise the options now even if they could as the share price is currently quite a bit lower than 41.5c. By end April 2014, up to 30% of the options could be exercised if share price were to rise above 41.5c, I suppose.



Mr. Sean Lee

This tells me that there is an even greater incentive for Mr. Sean Lee Yun Feng to steer the company towards higher earnings in 2014 (which would likely result in a higher share price) if he were to benefit from these share options. If you think that this looks like a strong alignment of the management's interests with those of minority shareholders', I won't disagree with you.

All else being equal, favour companies in which management has a significant personal investment over companies run by people that benefit only from their salaries. Peter Lynch.
Read page 235, One Up On Wall Street.

Patience is sometimes the hardest part ... There is simply no way to know when a particular stock will appreciate, or if, in fact, it will.
From: http://singaporeanstocksinvestor.blogspot.sg/2013/02/little-book-of-value-investing.html

See:
Employee Share Option Scheme.

Related post:
Marco Polo Marine: It got cheaper.

Marco Polo Marine: A video.

See Marco Polo Marine's yard and some of their vessels in action.

Related post:
Marco Polo Marine: Will FY2013 better FY2012?

9M 2013 income from S-REITs and more.

Three more months to the end of the year. Lots of things have happened in the first 9 months of the year. I want to zoom in on the investment front and record some of my thoughts.

The strategy to be invested in S-REITs for income is still working. Of course, with the spectre of the Fed cutting back on QE and a possible increase in interest rates in the next 2 or 3 years, Mr. Market has turned cautious on leveraged investments like S-REITs. This is only natural. Unit prices of S-REITs have become more realistic as a result.

When Mr. Market is pessimistic, that is when we are likely to get good deals. As to what is a good deal, I am sure this is rather subjective. Every person would have a different idea of what is an acceptable margin of safety. Every person would have a different perception of a REIT's prospects.

Having built up a relatively large portfolio of S-REITs, I devoted more resources to investing in what I believe are undervalued stocks, something which I continue to do in 2013.

So, essentially, what I have done is to keep what has worked well for me thus far while expanding my investments in certain companies, recognising possibly more difficult times ahead for S-REITs. 

This is an approach that requires more work than simply getting passive income from S-REITs but the time when it was a no-brainer to buy and hold S-REITs probably ended sometime in the second half of 2012.

For 9M 2013, how much did I receive in passive income from S-REITs? 

$92,872.65

Full year 2013 income from S-REITs is most likely going to be lower compared to 2012 because I sold a significant portion of my investment in LMIR earlier this year and also because Saizen REIT distributes income half yearly (i.e. there is no income distribution in December from Saizen REIT).

Also, we might want to bear in mind that, although hedged, the weaker Indonesian Rupiah and Japanese Yen could result in lower income distributions in S$ terms for unit holders of these REITs in the year 2014.

With twice as much industrial space being scheduled for completion in 2014 and 2015 than any single year in the past decade, the possibility of stagnating or even a reduction in income for industrial S-REITs in future cannot be discounted. This is why looking at WALE (Weighted Average Lease Expiry) of industrial S-REITs is more important now.

Although I would have liked nothing better than to sit back and collect passive income regularly from S-REITs, doing very little else, I decided to move out of my comfort zone. For sure, there were bumps along the way but my efforts have generally been rewarding thus far. 

What did I do?

I increased my investments in stocks which are likely to be dependable passive income generators such as SPH and NeraTel. 

I also hold long positions in stocks which I believe would benefit from the Chinese consumption story such as CapitaMalls Asia, PCRT and Wilmar. 

Any dividend from investing in these stocks and any gain from trading would go towards cushioning the possible decline in income from S-REITs in future.

Up to 15 September 2013, the total gain from trading this year amounts to: 

$188,625.13

It was fortuitous the way the China Minzhong saga turned out. It preserved my trading gains and grew it rather significantly at the same time. Apart from my long position in Wilmar, all other investments are in the black. 

So, what is my plan for the future? 

Nothing profound really. 

If prices were to decline much more, I hope I would be brave enough to buy more. If prices were to rise much more, I hope I would remember to sell some.

The grand scheme is to augment and not to replace my passive income portfolio. 

For sure, it doesn't mean that I think S-REITs are going the way of the Dodo. Indeed, they are still good investments for income at the right prices. For me, passive income from S-REITs will still be an important pillar in achieving financial freedom. This is unlikely to change in the foreseeable future.

Remember, this blog is not meant to instruct but if anyone finds it inspiring, I will be happy enough.

Related posts:
1. 2012 full year income from S-REITs.
2. Never lose money in real estate and S-REITs?
3. Do not love unless it is worth the loving.
4. Motivations and methods in investing.
5. Be cautious climbing the S-REIT tree.
6. Be comfortable with being invested.

Tea with Mike: Approach to stock selection

There are many ways of selecting stocks. Some people use ratios such as PER and P/B. Some people look at charts, spotting 52 weeks highs and lows. Some look for the highest yields. The list goes on. When I first started, I felt overwhelmed and didn’t really know what to look for.

Over the years, I adopted an approach that is similar to Graham's “large companies that are out-of favour” tactic. I look at alpha cyclical companies during their down cycles and I believed that will offer some margin of safety.

I bought into 2 counters, Golden Agri and YZJ, using this approach. For shipping industry, the Baltic Dry Index (BDI) hit record bottom at 661 last year. The peak was 11,000. Even if one were to take the average, we can quite safely say the BDI was nowhere near where it would be mid-cycle. Shipping down cycle is characterized by a dearth of new shipbuilding orders, collapse of freight rates, and the bankruptcies of weaker players, and all these have happened in the past 1 year. So, I can safely conclude that we are near the trough of a down cycle. Near? Yes, because there is no way to ascertain if we have reached the bottom yet.

Then, we search for alpha companies. These are companies in the sector that have the strongest financial strength and operating efficiency. This is so that our investment does not go to the dogs and get consumed by the down cycle. I shall not go into detail about YZJ, as that itself would be a long blog but, particularly, I looked out for a low gearing level.

Both Golden Agri and YZJ have low gearing levels. More important is the amount of short term loans to be repaid. Down cycles combined with the maturity of large loans is what killed many companies. Even the biggest private shipyard in China, Rongsheng, is facing severe difficulties because of this.

Next, while profits would be affected negatively, there should not be losses, and the companies should be big enough to show resilience in earnings through previous crises. There should be Free Cash Flow (FCF) in most of the operating years too

Golden Agri’s earnings are levered heavily on Crude Palm Oil's (CPO) price, and its production levels. If we look at the last 30 years, 2013 has seen CPO price falling more than 40% from its last peak. Although inventory has been piling up, Golden Agri will not be able to increase its production at the same rate it has been able to in the past. I bought it for its vertically integrated businesses and its economies of scale. For higher production growth, one should, perhaps, look at First Resources.

This approach requires a lot of patience as the sectors are out of favour and there is very little chance that the share prices would shoot up suddenly. Also, as AK always says, cheap could get cheaper and this is especially true in such out of favor stocks. Say ship building and most people would frown. So, there might be selling pressure from time to time but if the companies are fundamentally strong, such selling pressure provides opportunities for accumulation.

I would like to acknowledge that I first got some ideas and information from Calvin Yeo of "Invest In Passive Income". A link to his blog can be found in the left side bar of AK's blog.

-------------------

AK's comment:

I was heavily invested in Golden Agriculture at one time, recognising that it was heavily levered to the price of CPO. When CPO price was rising relentlessly, Golden Agriculture was a good investment. I made a tidy sum from it. Mike's approach is valid, I am sure, but one has to be patient.

We could consider investing in Wilmar International which also has an exposure to CPO but it is less levered to CPO production which forms less than a fifth of its earnings. Wilmar has a pretty diversified earnings base. However, if we are looking for positive Free Cash Flow, then, Wilmar would fail our selection process.

As for ship builders, I would also frown when I hear the phrase. However, we can find nuggets in the sector and when we look at what Cosco and YZJ are doing, we know where to look because these yards are venturing into building for the O&G industry. This is what KepCorp and SembCorp have been doing for years. With more rigs delivered, there is a higher need for OSVs and, yes, I am invested in Marco Polo Marine which has the added advantage of a strong moat. However, if we are looking for positive Free Cash Flow, then, Marco Polo Marine would fail the selection process too.

I believe that Mike's approach is probably suitable for anyone who is more conservative since stronger companies in cyclical industries are unlikely to go bust in a down cycle. When the up cycle returns, these companies should lead the recovery.

Thanks, Mike, for offering us your perspective on stock selection. It has provided me with food for thought.

Marco Polo Marine: It got cheaper.

Mr. Market has been oozing pessimism and I mentioned in a comment recently that Marco Polo Marine's stock is looking very attractive to me now but I also mentioned that cheap could get cheaper. It would be safer to add to my long position if I should see a reversal signal.

Well, I think I might be seeing positive divergences. One could argue that Marco Polo Marine is such a thinly traded stock that TA is practically useless. Valid point.

Then, what about FA? If I were to use the EPS for FY2013 which I estimated in an earlier blog post to be 5.4c, at a share price of 34c, we are looking at a PER of 6.3x. I think that is pretty attractive considering that I expect FY2014 EPS to improve significantly by some 20%.

Marco Polo Marine is my largest investment right now and its current share price isn't that far from the prices I first paid more than a year ago. Those were at 31.5c to 32.5c.In fact, I also bought more at 34c in September last year.

I believe buying at 34c now provides more margin of safety and better value for money than a year ago. Now, who says opportunity doesn't knock twice?

Related post:
Will FY2013 better FY2012?

What do these stocks have in common?

Which stocks am I referring to?

1. Marco Polo Marine
2. Yongnam Holdings Limited
3. AIMS AMP Cap Industrial REIT
4. Asian Pay Television Trust
5. Saizen Real Estate Inv Trust

They have all been upgraded by Maybank Kim Eng to 100% valuation in their list of marginable stocks.

Own any other stocks shown in the photo?

Marco Polo Marine: Will FY2013 better FY2012?

Year on year, Marco Polo Marine's ship chartering business enjoyed growth in revenue of 147.2% to S$39.3 million for the first 9 months of FY2013. It grew 234.6% to S$17.4 million in Q3 of FY2013 alone.

Ship building and repairs, unfortunately, weakened 52.3% and this reflects the issue of serious over capacities dogging shipyards everywhere.

The question to ask is whether ship chartering is able to pick up the slack and I think it is reasonable to expect that it would. This could be a good thing too as Marco Polo Marine's ship chartering business is a higher margin business compared to ship building and repair.

For the same 9 months in FY2012, ship chartering accounted for 22.7% of total revenue. Now, it accounts for 60.4%. If the malaise in ship building and repair should continue and it seems like it would, ship chartering would probably account for an even bigger share of total revenue especially with the contribution from the AHTS, MP Prevail, which was acquired in June 2013, kicking in.

This growth in revenue from ship chartering will gain momentum as Marco Polo Marine plans to buy another AHTS before end of the year if the opportunity should present itself. They are also building more AHTS in their own shipyard for delivery to BBR in 2014.

For the full FY2012, revenue was about S$ 90 million. For the first 9 months of FY2013, S$ 65 million in revenue has been recorded. So, the group needs to generate another S$25 million in revenue just to equal last year's performance.

It is likely that we will see ship chartering's revenue in Q4 exceeding Q3's S$17.4 million due to contribution from MP Prevail. Another S$0.5 million, perhaps? So, estimated revenue from ship chartering in Q4 could be in the area of S$17.9 million.

Unless ship repair generates lower revenue in Q4 compared to Q3, it is more likely than not that FY2013's overall revenue will equal FY2012's or maybe even exceed it by a bit.

Furthermore, due to the higher margins in the ship chartering business, I would not be surprised if net profit turns out to be higher in FY2013 compared to FY2012 despite a lack of overall revenue growth, exceptional gain of $5.7 million not withstanding.

Anyone who is investing in Marco Polo Marine must be willing to wait as the numbers are expected to improve significantly in FY2014. This means a waiting time of another 12 to 15 months.

Some numbers now for 9M FY2013:
EPS: 5.32c
NAV: 46.8c per share.
Gearing: 59.2%

Stripping out the exceptional gain of $5.7 million, what I believe to be a fair estimate of the EPS for the full FY2013 is around 5.4c. So, at 38c a share, we are looking at a PER of 7x. I don't think the stock is expensive. Given the probability of higher earnings in FY2014, definitely, it is not expensive.

Although I expect that the company is able to repeat a DPS of 0.8c in the next quarter given its cash position, it is perhaps more prudent to refrain from doing so given its current strategy to grow its fleet of OSVs more aggressively.

If there should be a decline in share price, I see support provided by the 100w MA at 37c. I would probably buy more if that should happen.

See media release: here.

Related post:
Marco Polo Marine: Bracing news from Indonesia.

Marco Polo Marine: Bracing news from Indonesia.

Some news from Marco Polo Marine's subsidiary, PT Pelayaran Nasional Bina Buana Raya Tbk:

1. They are seeking to purchase another new AHTS before the end of 2013. I like this because this will allow them to capitalise on the higher rates in Indonesia more rapidly.

2. The management is projecting at least a double digit growth in revenue and profits in 2013!

Things are looking pretty good and the Indonesian growth story is cruising ahead at full steam.

Would I buy more of Marco Polo Marine's stock?

If Mr. Market is willing to sell to me cheaply again, why not?

Related post:
Which stocks have I been accumulating in June 2013?

Reference:
RESUME HASIL PAPARAN PUBLIK TAHUNAN

Vard Holdings: Initiating coverage.

I have always liked the sound of the phrase "initiating coverage". It reminds me of some movies I watched before where a person in a war room would be standing ready to press a red color button while announcing "initiating launch sequence now". Quite exciting.

Well, talking about Vard Holdings might not create the same kind of excitement for some readers especially for those who have bought the stock at much higher prices. For sure, there is no paucity of BUY calls from analysts on Vard Holdings.

I remember replying to a reader a couple of months ago that we could see a rebound because of a positive divergence but with the downtrend intact, share price could go lower.

In yesterday's session, Vard Holdings' share price hit a new 12 months low of 83c. So, is share price at the start of a recovery today? This is a question I do not have the answer to. However, technically, there is no reversal signal. So, if share price should trend lower, it would not surprise me.

If it should trend lower, a critical support would be at 79c, the low formed in October 2011. Remember, this is what I see in the chart and it does not mean that it will happen.

Of course, there is always a possibility of a sharp rebound in which case, we could see a gap covering at 96c or a test of gap resistance at 99.5c.

Fundamentally, it is quite easy to see why there are so many BUY calls.

Doing a quick valuation exercise, at 83c a share, Vard Holdings does not seem expensive. In fact, it seems quite cheap now. I went through the numbers and its 1Q FY13 EPS works out to be 3.37c. Annualising this and using a PER of 7x will give us a value of 94.5c while a PER of 8x will give us a value of $1.08.  Why 7x or 8x? Well, that is the kind of PERs we are looking at with smaller yards like ASL Marine and Marco Polo Marine. 

So, at 83c, Vard Holdings is actually trading at an even lower valuation compared to smaller yards? Yes, that would seem to be the case from a price earnings perspective.

If we believe that the demand for OSVs is on the rise, then, Vard Holdings should be a logical beneficiary. However, we should bear in mind that although the stock might seem like a compelling buy, share price could weaken further. So, unless we are mentally prepared for such a possibility, it might be better to wait for clearer signs of a reversal.

After all, Vard Holdings did issue a profit warning due to higher than expected cost overruns at its Niteroi yard as well as higher than expected start-up costs at its new yard, Promar, which was what sent its share price diving.

Related post:
Marco Polo Marine: 1H FY2013.

Note:

Vard Holdings Limited ("VARD") will release its financial results for the second quarter and half year ended 30 June 2013 after market closes on Thursday 11 July 2013.

Which stocks have I been accumulating in June 2013?

As share prices decline over a prolonged period, Mr. Market's hope for a swift recovery becomes weaker and weaker. As Mr. Market despairs, he is going to sell stocks at even lower prices. Everything else remaining equal, this means that we can buy stocks with greater margins of safety from Mr. Market.

However, remember that Mr. Market is a fickle creature. His mood swings are well known. So, although waiting for the market to bottom sounds like a great idea, it is only possible to really call the bottom once it has come and gone. Therefore, I made a list of stocks which I would like to buy more of, including the prices which might be good to do so at.

Mr. Market's negativity is centred around expectations of a reduction in global liquidity and increase in interest rates. However, such concerns are really premature since what is really going to happen is a reduction in the growth of global liquidity and, by Ben Bernanke's admission, any increase in short term interest rates is farther into the future.

This suggests that S-REITs which are fundamentally sound will continue to deliver, distributing the income which I have become accustomed to receiving. With prices 15 to 20% lower than the peaks achieved not too long ago, valuations are more reasonable now although I would not say compelling.

So, which stocks have I been accumulating in the current correction?

Marco Polo Marine

I bought more shares of Marco Polo Marine at $0.37 to $0.375. I really like the news that the company bought a new 9,000 BHP AHTS at a bargain from a distressed yard. It would take the company's shipyard 18 months to build one from scratch and buying this AHTS allows Marco Polo Marine to more quickly meet market demands in Indonesia.

"Given the robust demand for OSVs and the gradual and consistent rise in daily charter rates experienced over the past  few months, the Group expects its offshore business to continue to spearhead the growth of its overall chartering revenue," Mr. Sean Lee, CEO, Marco Polo Marine.

Marco Polo Marine's listed Indonesian subsidiary has another 2 AHTS on order and these are being built in their own shipyard. Expected to be delivered sometime in 2014, Marco Polo Marine is likely to register much stronger performance next year. Buying at $0.37 to $0.375 is also a bargain as it is at >15% discount to NAV.

SPH

I got more shares of SPH at $4.22. That is some 10% lower than the top of $4.68 touched in early April a couple of months ago. Volume has also been reducing as price weakened. Sellers are less enthusiastic but without strong buying interest, price could drift lower.

Well, as Mr. Market would have it, SPH's share price went even lower today, closing at $4.16, the low of the day. The optimism surrounding SPH's plan to bundle Paragon and Clementi Mall into a REIT seems to have evaporated, hinting at the pessimism surrounding all things S-REITs at the moment.

At this time, remind ourselves that the listing of SPH REIT is a good thing for SPH's shareholders. It strengthens SPH's balance sheet without really compromising its revenue stream from its real estate holdings. SPH will see its gearing level reducing to almost zero.

With the promise of a special dividend of 18c per share, post SPH REIT's listing, there is a cushion against further decline in share price which, using Fibo retracement lines, will find support at:

$4.11 (123.6%)
$4.04 (138.2%)
$3.99 (150.0%)
$3.93 (161.8%)

Remember that TA shows where the supports are. There is no promise that the supports will be tested.

Certainly, if the opportunities should present themselves, offers at $3.93 or $3.99 a share cum special dividend of 18c would be more attractive propositions.

NeraTel

This is a stock which I got in at 40.5c a share some time back. This was after the failed take over bid by ST Engineering. I didn't do much research on this company on my own. Neither did I have any experience with it. Instead, I relied on some advice by a very good friend who has been a shareholder for years.

This is a net cash company and has a record of paying consistent and meaningful dividends. Its last payout was 4c a share with an EPS of 5c. At today's closing price of 61c, we are looking at a dividend yield of 6.56% which is very decent. With its recurring revenue streams, dividends are probably sustainable.

So, I bought more shares of NeraTel as its share price retreated from a high of 69.5c. With buy prices of 60c to 63c, the dividend yields are from 6.35% to 6.67%. Any further weakness and a possible test of the rising 200d MA (approximating 57.5c now) for support would see me increasing my long exposure.

Certainly, I cannot tell how share prices will move tomorrow. So, I cannot tell if my additional investments made recently will result in paper losses but I can tell if I have made relatively sound decisions.

By looking at charts, I can tell where supports are expected to be found. So, I can tell where I might be adding to my long positions, given the chance.

Some things we know. Some things we don't.

I know, for sure, that we should have a plan and we should stick to it.

Related posts:
1. Spotlight on Marco Polo Marine.
2. SPH: A REIT investment.
3. REITs: When to buy?
4. REITs: Are we asking the right questions?
5. Be cautious climbing the S-REIT tree.
6. Have a plan, your own plan.

Marco Polo Marine: H1 FY2013 EPS up 61.2%.

One of the numbers I always look at first in the reports of the companies I am invested in is earnings per share (EPS). As a shareholder, how the company performs on a per share basis matters a lot to me.

This evening, I got the positive results that I was expecting from Marco Polo Marine.

Results which were released at 5.38pm revealed a 61.2% increase in H1 FY2013 EPS compared to H1 FY2012. This is over and above my expectations.

With H1 FY2013 EPS at 4.06c, we could be looking at a full year EPS of close to 8c. This means that at today's closing price of 42.5c, Marco Polo Marine is trading at a modest PER of only 5.3x!

To trade at the 8x PER which I think is closer to fair value would mean a share price of 64c! This is much higher than my initial fair value estimate made many months ago which was 50.5c.

Realistically, I do not expect Marco Polo Marine's share price to trade at 8x PER soon. However, a re-pricing to 6x PER does not seem too far fetched. This would put share price at 48c or 12.9% higher than today's closing price.

Now, in my perfect world, tomorrow will see Marco Polo Marine's share price gapping up and hitting 48c. Of course, this is not my perfect world and we can only wait and see how Mr. Market will react to the rather bracing results tomorrow.

Read Media Release: here.

Related post:
Marco Polo Marine: Is this a good time to buy more?

 

Marco Polo Marine Ltd is an integrated marine logistic company which has expanded to become a reputable player in the marine industry in the region.
The Group’s ship chartering business provides Offshore Supply Vessel (OSVs) which are mainly Anchor Handling Tug Supply (AHTS) vessels currently being deployed in regional waters including the Gulf of Thailand, Malaysia and Indonesia, as well as tugs and barges to its customers, especially those engaged in the mining, commodities, construction, infrastructure and land reclamation industries.

The Group’s shipyard business undertakes ship building and maintenance as well as repair, outfitting and conversion services in Batam, Indonesia. Occupying a total land area of approximately 34 hectares with a seafront of approximately 650 meters, the modern shipyard also houses three dry docks which have led to the Group scaling up its technical capabilities and service offerings to undertake projects involving work of mid-sized and sophisticated vessels.

How to tell if a company is a potential takeover target?

Sometimes, we see companies being taken over and, many times, at a huge premium. Have you wondered how takeover targets are determined?

Well, quantitatively, one way to determine if a company has the potential to be a takeover target is to look at its Enterprise Multiple. This is a financial ratio that is arrived at by dividing Enterprise Value by EBITDA (earnings before interest, taxes, depreciation and amortisation).

So, to understand Enterprise Multiple, we have to understand Enterprise Value and EBITDA.

Enterprise Value is the company's market cap plus debt, minority interest and preferred shares, minus total cash and cash equivalents. This is a more accurate takeover valuation than just looking at the company's market capitalisation.

EBITDA is used to evaluate profitability of a company. EBIT looks at operating profits and EBITDA looks at earnings before any accounting or financing adjustments come into the picture.

Put Enterprise Value over EBITDA and we get a ratio. The lower the ratio, the more attractive the company is as a takeover target because a lower ratio suggests that the company's valuation is cheaper.

Of course, each industry has its own norms. So, a low Enterprise Multiple does not make a company a more attractive takeover target if every company in the industry has the same low ratio. If, however, a company has a much lower Enterprise Multiple than its peers, then, it is probably an attractive takeover target.

See the Enterprise Multiple of China Minzhong: here.
See the Enterprise Multiple of ASL Marine, Marco Polo Marine and Jaya Holdings: here.

The above links bring us to a service provided by "Infinancial Analytics" which I discovered quite by accident. I wish to draw readers' attention to the section on "About Market Valuation" at the bottom of the pages.

Although useful, EV/EBITDA is only one approach in valuing a company and shouldn't be the be all and end all.

Related posts:
1. China Minzhong: New substantial shareholder.
2. Marco Polo Marine: A neglected gem.
3. Recommended books for FA.

Marco Polo Marine: Is this a good time to buy more?

Yesterday, I met up briefly with some friends. It was a very invigorating experience as we talked about value investing. When asked if there was a stock which I thought would pass any fundamental analysis on both quantitative and qualitative aspects, without hesitation, I said "Marco Polo Marine".

Massive shortage has resulted in a 15% to 20% AHTS charter rate premium in Indonesia .

I have blogged extensively about Marco Polo Marine's business and why its stock was undervalued and how, even now, it is inexpensive. However, Mr. Market is a sentimental being and how he feels is more important than how he thinks. So, can we tell how Mr. Market feels about the stock?

I have mentioned about the glaring negative divergence in the chart a few times before and how anyone who should buy in then should be cautious enough not to throw in everything including the kitchen sink.

Since touching a high of 45c a share, the stock price has been drifting sideways with immediate support at 41c. Although volume is necessary to push price higher most of the time, it is not necessary to have volume to see price weakening over time, and volume has been very thin in the last month or so.

So, is this a good time to buy more of Marco Polo Marine's stock?

Although valuations are still very undemanding, I get the feeling that Mr. Market is waiting for a positive catalyst which could give the stock price a sugar rush.

In the meantime, we could expect some long holders to sell out their positions. Are they wrong to do so? Well, they could have found better places for their money or they could see with more clarity than I could that stock price is going to suffer a significant decline. Or they could have simply lost patience. There are so many possible reasons.

I like to think that a sideway movement in an uptrend is more bullish than bearish. When there is sideway movement, I like to look at the Stochastics which, in this case, seems to be turning up in oversold territory. Also, as the stock price formed lower highs, CMF has formed higher highs which suggests to me that smart money is still flowing into the stock even as its price seems to be stuck in the doldrums.

I told my friends that we should be brave and be invested. However, we should have a war chest ready. We could see share price lowering to test supports at 41c, 40c or even 39.5c where the rising 100d MA is approximating. 

Having said this, there is no guarantee that supports would be tested. So, if we are still waiting by the side, this is a possibility that we have to accept.

Even though I have strong conviction, I remain pragmatic and if things should go awry, I have the resources to ride through the rough patches. Stay invested but stay prudent.

Related posts:
1. Stock picking: Spotlight on Marco Polo Marine.
2. Marco Polo Marine: Insider buying continues.

Marco Polo Marine: Shipyard and Indonesia.

Why did Marco Polo Marine start a shipyard in 2005?

CEO: The shipyard is a support business with ship repair, conversion and maintenance... As we continue to grow..., we require more vessels... hence the natural progression into shipbuilding.

... the shipyard will remain focused on ship repair and conversions... the ship repair business is one that is seasonal but non-cyclical. If you own a ship, you are required to conduct mandatory servicing and maintenance.

Keppel Corp and Sembcorp Marine focus on shipbuilding and ship repairing of the larger vessels. We on the other hand target the medium and smaller vessels that take up most of the population of the ships around this region.

What are the prospects for Marco Polo Marine's core business, tug and barge operations, in Indonesia?

CEO: Indonesia produces over 200 million tonnes of coal every year... 36 new plants are currently being built in Indonesia and they have the combined capacity to generate over 20,000 megawatt of electricity.

... there are over 100 independent power plants in Indonesia, 80 to 90 additional tons of coal will be needed domestically in the near future.

How are you going to move the coal to the power plants? We need more tugs and barges because large vessels cannot manoeuvre around the rivers of the Indonesian mine sites... the demand for Indonesian flagged vessels will remain strong at least for the next five to six years.

Source: Marine Money Offshore.

Related post:
Marco Polo Marine: The CEO speaks.

Marco Polo Marine: The CEO speaks and the technicals.

I came across a recent interview with the CEO of Marco Polo Marine, Mr. Sean Lee. Although many things he said are not really news to me, it is still good to hear his statements. There are a few things he said which gave me a greater understanding of the company's competitive advantage and why they are well positioned to do better over time.

Of course, we know that the Indonesian Cabotage Law contributes to Marco Polo Marine's strong economic moat. This coupled with a shortage of OSVs in the country has put Marco Polo Marine in a strongly favourable position. This shortage is likely to persist with the Indonesian offshore oil and gas exploration growing at a faster clip as the government plans to have domestic oil production catch up with domestic consumption.

“As demand continues to grow, the industry can also be expected to move towards more complicated offshore exploration activities and to deeper eastern waters. This implies that there will be a sustained demand for rigs and as a result, more OSVs, indicating strong growth potential for our ship chartering business in the Indonesian offshore market over the mid to long term,” Mr Lee anticipates.

“However, the supply of OSVs in the Indonesian market has been limited due to the Cabotage rules which are stringently enforced. Currently, the Indonesian authorities allow only Indonesian-flagged vessels to operate in Indonesian waters. Among other regulations required of the company such as having to own a 5,000 ton gross registered tonnage vessel within its fleet, for vessels to be Indonesian-flagged, it has to be majority owned, i.e. 51 percent, by Indonesians. This thus creates a high entry barrier for foreign OSV operators,” he added.

The other engine of high margin growth for Marco Polo Marine is in ship repair, outfitting and maintenance. People may well wonder how come Marco Polo Marine's shipyard enjoys such a high utilisation rate and why they can do so well?

“About 90 percent of our ship repair, outfitting and maintenance works are performed for third parties. We see a very sustainable business for ship repairs in the longer term given the strategic location of the shipyard at Batam, which is less than an hour from Singapore, where hundreds of vessels pass through every day. As such repair and maintenance works are knowledge intensive as well as time and location sensitive, the Group can command better margins being shielded from low-cost competitors. Targeting medium-sized vessels have also helped us to differentiate itself from bigger players in the market. All the above factors have provided support to MPM’s financial performance despite the lull in shipbuilding.”

Credit is given to Ong Qiuying of Shares Investment for the interview with Mr. Sean Lee. To read the full article, see: Marco Polo Marine: Generating Growth Through Offshore Oil & Gas Exposure And Publicly-Listed Indonesian Subsidiary (22 Feb 2013).

Although Marco Polo Marine is fundamentally sound, the stock's technicals give me cause for concern as a negative divergence has clearly formed. Share price has been rising while volume has been reducing. Volume is the fuel that drives rallies. Without volume, the sustainability of any upward movement in price should be questioned. Lower highs on the MACD confirms a weakening of positive momentum.

I have sounded this cautionary note before, regular readers will remember. So, bearing the less encouraging technicals in mind, even as we stay positive on Marco Polo Marine's fundamentals, we must remind ourselves that there could be a chance to accumulate at lower prices. If I were to initiate a long position in Marco Polo Marine now, it would be a hedge. I wouldn't throw in everything including the kitchen sink.

Related posts:
1. Marco Polo Marine: Indonesian Cabotage Law (Part 2)
2. Marco Polo Marine: Insider buying continues.

Stock picking: Spotlight on Marco Polo Marine.

I received a very well written email from a reader with some very good questions. I have a gut feeling that the questions and my reply could be of interest to other readers and decided to publish our emails:

 

Hey AK,

I have been quite an avid reader of your blog since I chanced upon it last year. Your blog has taught me a lot about investing, in particular, fundamental analysis (I was a complete klutz on this before). I believed more in technical analysis back then, but your blog has shown that a good investor has to accord time and effort to both technical and fundamental analysis, in order to make rational decisions. So, just wanna say a word of thanks for showing me the ropes and helping me be a better investor.

I find your analysis very objective and illuminating, and truly I am learning something new with every post you publish. But above all, I am struck by your humbleness and willingness to help other budding investors out with tips to aid our financial journey. I dare say, precious few who are blessed with such good grasp of the market as you are, will be willing to share this with other people.

If you don't mind, I like to ask you a question on fundamental analysis, as I concede I am really terrible at it. Take for instance, Marco Polo Marine, where you have astutely highlighted out its sound fundamentals and strong economic moat. Can I just enquire what made Marco Polo stand out as an outstanding stock to you in the first place i.e. how did it get on your radar? I read that you noticed the high insider trades... is monitoring of insider trades a first requisite step to identifying strong fundamental plays? I'm asking because, there are so many companies out there, and one cannot possibly research everything, so I was wondering what aspect of their fundamentals you will notice first, before it gets on your "monitoring list" for further research? (Btw, I have taken your advice, and taken a closer look at MPM and am now vested in it too - so really wanna shoutout a word of thanks)

Secondly, and still on MPM, I understand that a great portion of the moat comes from the cabotage law. Would you say that actually this makes MPM rather vulnerable to policy uncertainities in Indonesia? For instance, if Indonesian authorities face strong appeals from the Indonesian oil and gas lobby and then decides to rescind the cabotage law - then surely MPM could be, pardon the pun, be left high and dry, its moat all gone. Additionally, is reflagging one's vessels under Indonesian colours a substantial barriers to entry? If not, then we could see supply (in terms of reflagged vessels) coming back into play, eroding any advtg MPM had. Of course, I do still have my eye on the attractive P/E of MPM at 6 vis a vis its peers e.g. Jaya, ASL. But in your opinion, if not for the Cabotage Law, would the P/E of 6 be sufficient reason for you to purchase MPM?

Keen to hear your thoughts on the matter, and once again, thanks for all your insights.

Cheers,
T..

 

 

My reply to T..:

 

Hi T..,

First off, I don't give advice. I am not allowed to. My blog is a place where I talk to myself and I cannot help it if people overhear what I say (as I talk rather loudly). If overhearing me talking to myself has helped you on your own journey, I am happy. ;)

Regarding Marco Polo Marine, yes, it was the continual insider buying that prompted me to dig into the stock. Insiders could sell their stakes for myriad reasons but to increase their stakes and by large amounts, it could only mean that they think the stock is undervalued.

Keeping a tab on insider buying activities is one way we could possibly find undervalued stocks since insiders know their businesses best. Of course, it should not be the only thing we look out for. We would still have to look into the numbers from reports and look at analyses by research houses if they are available.

As for how to generate a "monitoring list", I try to read as much as possible. I like to get a feel of macro economic trends which are helpful in telling us about the health and prospects of different sectors and countries. This is, of course, a top down approach.

This should be followed by a bottom up approach as we look at different companies with businesses in the sectors and countries which are likely to do well. Of course, this is where we examine the income statements, the balance sheets and the cash flow statements. Then, there are all the different ratios.

Having done all these, I would look at the charts as I believe technical analysis provides a window into the collective pyschology of market participants. In a bearish situation, cheap could get cheaper. In a bullish situation, dear could get dearer.

Then, make a decision. Of course, decision making is based on the best knowledge we have at any point in time. That best knowledge must also include the risks involved from a fundamental as well as a technical perspective.

The most important knowledge of all is self knowledge. Can we accept the risks involved? Don't just think of the possible gains. In the event that we should suffer a paper loss, how would we probably react? I always say that a peace of mind is priceless.

Now, all these might make me sound like I am infallible. I am not.

Sometimes, I get lazy. Sometimes, I make mistakes. Sometimes, I get in too early. Sometimes, I miss the boat.

Before I digress further, on your concern that Marco Polo Marine's moat might dry up, I would say it is a pertinent question.

I cannot make any representation as to how probable a change to the cabotage law in Indonesia is going to be. However, if we take the cue from Mr. Lee Wan Tang who probably knows the sentiments of the Indonesian government better than us, then, it is a reasonable risk that we are accepting as investors, isn't it?

Foreign competitors could reflag their vessels if they are willing to take a minority stake in a potential Indonesian counterpart. Whether they are willing to do this, I don't know.

Would Jaya be willing to go into a joint venture with an Indonesian company, taking a minority stake, so that 3 of their OSVs (in a fleet of almost 30) could get back into Indonesian waters? Your guess is as good as mine.

Marco Polo Marine was able to react very swiftly and decisively to the cabotage law because the Lee family are Indonesians and the Indonesian company that Marco Polo Marine took a 49% stake in was their own. Indonesia is Marco Polo Marine's own turf, so to speak.

To answer your last question, although the cabotage law has been fortuitous for the company, without it, Marco Polo Marine's much cheaper valuation against its peers in the sector would be compelling reason enough for me to buy its stock as sector fundamentals suggest that positives are on the horizon.

I hope that I have addressed all your concerns.

Best wishes,
AK

 

Related posts:

1. Recommended books for FA and TA.

2. 5 rules for successful stock investing.

3. Little book of value investing.

4. Be comfortable with being invested.

5. Risks, risks and risks.
6. Marco Polo Marine: Insider buying continues.

Marco Polo Marine: Insider buying continues.

Mr. Lee Wan Tang, Chairman of Marco Polo Marine, purchased 1,000,000 shares at a price of 42c per share yesterday. This was disclosed in an announcement today.

Mr. Lee's direct and deemed interest in Marco Polo Marine increased to 59.52% (202,811,374 shares) with this latest purchase. He has, in slightly more than a year, since December 2011, increased his interest in the company by about 9,000,000 shares.

Conventional wisdom tells us that a high level of insider ownership suggests that the management's interests are aligned with shareholders'. When there is a meaningful increase in insider buying activity, shareholders should be more than just interested.

Insider buying at 42c a share could explain why those of us who have been waiting to collect at 41.5c or lower have not been able to get our orders filled. Technically, immediate resistance is at 43c, the last high.

Nobody wants to buy at resistance and this is probably why volume has reduced which suggests an overall picture of caution.

Insiders probably don't care much for technicals and using insider buying activities as a guide for short term share price performance is probably not a good idea. However, using the same in our longer term investment decisions could prove to be more fruitful and for those of us who bought some at 42c a piece, we could take comfort from knowing that Mr. Lee did so too.

Conservatively, I value Marco Polo Marine at 50.5c a share which is 8x PER based on the EPS of last year. They are likely to see higher earnings this year. So, keeping 8x PER as a guide to a fair valuation, 50.5c could turn out to be an understatement.

See announcement: here.

Related posts:
1. Marco Polo Marine: Indonesian Cabotage Law (Part 2).
2. Marco Polo Marine: Still cheap.

Marco Polo Marine: Indonesian Cabotage Law (Part 2).

Some of the best kind of information we can collect regarding a company's prospects is from revelations by other companies in the same industry. I would like to share something I came across in NextInsight on Jaya Holdings which was published on 12 February 2013.

It was revealed that Jaya Holdings, from chartering its vessels to the O&G industry, "reaped US$7.8 million net profit compared to the paltry US$0.4 m in the same quarter a year ago."

"The jump in chartering net profit came from Jaya's charter fleet enjoying an 80% utilisation rate in 2Q2013 versus 62% a year earlier.

"The higher demand came with higher averge daily charter rates: US$12,685 versus US$9,222.

"The seas, however, have turned choppy. Jaya is expecting its fleet utilisation rate to sink somewhat in the current 3Q2012.

"A key reason is the implementation of (long-deferred) cabotage rules by Indonesia effective 1 Jan this year, which has led to the cancellation of charters for 3 Jaya vessels in Indonesian waters. That's 3 out of 28 vessels in Jaya's fleet."

CEO Venkatraman Sheshashayee revealed that chartering vessels in Indonesia was providing a decent rate of return on investment. However, now, "the rates there are probably climbing upward because now there is a serious shortage of vessels there."

Jaya's revelations bolster my strong believe that Marco Polo Marine's economic moat has strengthened and that it is positioned to benefit from higher charter rates in Indonesia this year.

The writing is on the wall and early investors in Marco Polo Marine will benefit.

To read the full article, visit NextInsight:
JAYA HOLDINGS: Strong Chartering Profit in 2Q

Related post:
Marco Polo Marine: Indonesian Cabotage Law.

Marco Polo Marine: Indonesian Cabotage Law.

Someone told me I have been blogging a lot about Marco Polo Marine lately. Well, I guess it is natural since I think this is a company that is doing well and is likely to continue doing well.

My continuing research revealed that in Indonesia, foreign vessels that perform surveys, drilling, offshore construction, offshore activities, dredging work, salvage jobs and underwater activities for the oil and gas sector are exempted from the cabotage law.

The cabotage law? Indonesia enacted a cabotage law in 2005, but enforcement was delayed for years.
The Indonesian Cabotage Law requires all vessels operating in the country’s waters to register as Indonesian-flagged vessels by 7 May 2011.

Marco Polo Marine via its Indonesian subsidiary company, PT Pelayaran Nasional Bina Buana Raya ("BBR"), reflagged all its vessels earmarked for plying in Indonesian waters to comply with the law.

Apart from tugs and barges, Marco Polo Marine also owns anchor handling tug supply (AHTS) vessels. What are these? They are vessels built to handle anchors for oil rigs. So, with the exemption mentioned earlier, does it mean that Marco Polo Marine's fleet of AHTS is at a disadvantage?

Further research found that there is a requirement by the Indonesian Transportation Ministry for companies to prioritize local companies as service providers in oil and gas shipping.

Local and foreign companies are required to seek Indonesian-flagged shipping companies first in a tender. They can turn to foreign firms if they fail to get local companies within three rounds of bidding. Even then, they can only use foreign vessels through a local company!

I am of the opinion that a substantial part of Marco Polo Marine's economic moat is provided by the Indonesian Cabotage Law. This allows them to charge a premium on its charter rates which OSK Research has called the company's most promising source of high margin growth.

References from The Jakarta Globe:
1. Govt Exempts Oil, Gas Vessels From Cabotage Law.
2. IPO-Bound Shipper Buana Plans to Cash in on Cabotage.

Related post:
Marco Polo Marine: Looking into the future.