Courage Marine: Riding the waves of recovery.

Admittedly, I have always thought of the shipping industry as a very difficult one.  Huge capital expenditure is required and the ongoing maintenance expenses are substantial as well.  I also do not like how its huge capital expenditure is on assets which are depreciating in nature.  Furthermore, its fortunes are tied inextricably with those of the global economy.  So, during difficult times like the recent crisis, shipping companies suffered badly.  Anecdotal evidence tells of hundreds of ships anchored off the shores of Singapore, idling away as there is too much spare capacity.

However, I am very much aware of the global economic recovery which is now well underway.  I targetted mainly three stocks in the second half of 2009: Healthway Medical for its defensive growth model, Golden Agriculture for the increasing demand for CPO and Saizen REIT for the compelling valuation and a contrarian play.  This year, I also increased my exposure to LMIR and AIMS AMP Capital Industrial REIT. Lately, I became interested in CapitaMalls Asia as I believe it would benefit from the rise of the Asian consumers.

Recognising that the global economic recovery is going to strengthen in 2010, it would be pure bigotry for me not to consider the shipping industry as a logical beneficiary. Latching once more on the theme that Asia is leading the world in this recovery, I decided to look at shipping companies with more of an Asian exposure.

Having learned some valuable lessons from this past crisis, I decided that the company I invest in should not have high gearing and it should be one that could control its costs well.  These factors are crucial for the survival of a company in hard times.  In this last crisis, many companies issued rights and even NOL went to shareholders with hat in hand despite having a powerhouse shareholder like Temasek Holdings:

"NOL's proactive capital raising will strengthen its balance sheet, enhance its financial flexibility and allow it to seize investment opportunities," Ong Beng Teck, managing director of investments at Temasek said in a statement. June 2, 2009 (REUTERS).

By some stroke of luck, the first shipping company I looked at in detail, Courage Marine, a dry bulk shipping business, has many of the qualities I am looking for. Established in 2001, the company has exposure primarily in Greater China.  This is their niche in the industry and fits well with my aim to look for a company which will benefit from a stronger and recovering Asia.

Being wary of the large capital expenditure that shipping companies have to make, I was very pleased to find that Courage Marine only buys and operates second hand vessels.  This maximises return on investment and minimises depreciation cost. Of course, what I then worried about was the cost of maintenance but they have been able to manage this as well, keeping cost of maintenance low.

I suppose this is the same rationale that buying a second hand car makes more sense than buying a new car for us common folks most of the time.  A new car depreciates rapidly in the first three years of its life.  If the cost of maintaining a second hand car is less than the premium we have to pay in order to buy a new car, it's a no brainer.

Next, I looked at gearing.  Courage Marine has very low gearing.  Gross gearing as of 31 Dec 2009 was at 6.2%, a reduction from 8.5% a year ago.  Taking into consideration that they have cash and cash equivalents of more than US$43m and total debt of only US$6.8m, Courage Marine is in a net cash position!

Courage Marine is not immune to economic slowdowns but through prudent management, it managed to reduce its debts and declare a dividend of US 0.47c per share for the year ended 31 Dec 2009.  Based on the last done price of S 20.5c, that is a yield of 3.1% (based on US$1 = S$1.37).  Not too attractive but try looking at the preceding three years when it declared dividends of US 1.888c, US 3.115c and US 1.41c.  Sounds more interesting?  This is a company that shares its profits with its shareholders.

Courage Marine has a NAV of US 10.41c per share.  At an exchange rate of US$1 = S$1.37, the NAV is S 14.26c per share.  At the last closing price of S 20.5c, it is now trading at a premium of 44% above NAV which I do not think is expensive.

Finally, what really caught my eye is the strong return to profitability in the fourth quarter of 2009.  Compared to a year ago, gross profit in the fourth quarter increased 523% and net profit margin improved to 25.9%!  I fully expect its revenue and profits to continue improving in 2010.  Taking last quarter's EPS as a guide, assuming that things stay stagnant, Courage Marine would have an annual EPS of US1.08c or S1.48c which, based on a share price of 20.5c, gives a PE of 13.85x.  Not expensive.  EPS is more likely than not to improve in 2010.

Courage Marine is a company that has a niche in the shipping industry.  It capitalises on its expertise in that niche and concentrates on what it knows best.  It is excellent in managing costs and it is conservative when it comes to financing new capital expenditure.  All these characteristics, I believe, translate into a strong competitive edge and business resilience.

When I arrived at this conclusion on 26 March, the next step was to look at the charts.  Its price closed at a high of 21.5c that day.  To me, 21.5c looks like the top of a base formation and I decided to wait and see if it would break out or retreat.  The next day, it went on to touch a high of 22.5c.  I thought I had missed the boat (pardon the pun) after all the FA that I did.

Fortunately for me, the price weakened to 20c on 31 Mar and seeing that it's where the flat 200dMA is and seeing how the rising 20dMA might just push up the price, I bought some then.  There is a chance that price might weaken further seeing how the MFI is in the overbought region but as the OBV does not suggest any heavy distribution activity, I believe that downside should be limited, perhaps to 19c, the confluence of the 100dMA and 50dMA.  A retest of the previous low would mean a floor of 17.5c although I do not think this likely.

I believe that Courage Marine is a well run company that is riding the waves of recovery and the market will recognise this in the usual way.  I would accumulate on weakness.