Marco Polo Marine (MPM) is an integrated shipping company with stakes in both ship chartering and shipbuilding and repair divisions. The ship-chartering segment provides tugboats and barges to their clients from different industries such as land reclamation, mining, commodities, infrastructure, etc. MPM’s chartering also provides transportation services for the transportation of coal from the mines to the electric power plants for Indonesia and other neighboring Asian countries to fulfill their growing energy consumption use. Also, MPM’s ship chartering has diversified into offshore chartering business mainly through the use of OSVs, trawling the waters of Australia and Thailand. MPM’s ship building and repair division, on the other hand, engages in shipbuilding, repairs and ship conversion services.
Looking at the past 5 years, we see that MPM’s revenues, gross profits and earnings increasing steadily. Its margins and ROE seem consistent as well. Its margins follow the primary revenue generator of the business, be it shipbuilding/repair or ship chartering. Higher margins exist for the ship chartering business, and lower margins exist for the shipbuilding and repair business. Thus, should we see the ship chartering division being the revenue driver, which would probably be the case for FY13, its margins would see an increase.
5-Year Financials of Marco Polo Marine
The financial ratios of MPM are listed below:
|Debt to Equity (9M 2013)||0.592|
|Forecasted Price-Earnings Ratio (excluding one-time gain)||7.82|
|Enterprise Multiple (over next 12 months)||2.96|
As of 20 November 2013, comparing with its competitors,
|Financial Ratios||Marco Polo Marine||Nam Cheong||Jaya Holdings||ASL Holdings|
|Net Debt to Equity||0.59||0.12||Net Cash||0.95|
Looking at the financials of the different companies, the one that stands out clearly would be Nam Cheong, with the highest ROE, ROA, and a low gearing ratio. However, if one were to investigate deeper, these attractive ratios is largely due to Nam Cheong’s build to stock model where it is able to earn higher margins due to the immediate delivery as compared to a long leadtime for the build to order model. Looking at Nam Cheong’s revenue breakdown, we see that its highest revenue generator would be that of shipbuilding, constituting 95.7% of total revenue, and 86.7% of total gross profit. The shipbuilding industry is a cyclical one, and the key in Nam Cheong’s business is its management’s ability to forecast demand of ships needed in the coming year ahead. Should it get its forecast wrong, a risk is selling excess inventory off at reduced prices as the costs of keeping inventory is high. Nevertheless, the outlook for Nam Cheong looks rosy with the high demand for OSVs in the region.
Nam Cheong’s Financial Breakdown
As for the other three companies, MPM, Jaya, and ASL, they have a strong balance of shipbuilding and ship chartering. MPM used to derive most of its revenues from its shipbuilding and repair division, but this has changed this year, with its ship chartering division forming the bulk of its revenues. Jaya’s offshore engineering division which is similar to a ship building division, has been a passive contributor to earnings over the last few years. In FY13, the division made a loss, while its chartering division was the main revenue generator. As for ASL, it had a mix between the divisions, with shipbuilding and repair forming a bulk of revenues of earnings.
Jaya Holdings Earnings Breakdown
ASL’s Revenue and Profit Breakdown
As I was looking for recurring earnings and a sustainable advantage, I preferred a company which had strong relationships with its customers in terms of chartering operations. The shipbuilding sector tends to be lumpy and if the downturn persists, earnings will definitely be affected.
Comparing the fundamentals of these 3 companies, MPM stands out with a higher ROA, ROE than the other two. Its gearing is higher than Jaya, but lower than ASL’s. Its margins are similar to Jaya’s, but much higher than ASL’s. I believe one reason why Jaya’s margins are relatively high is due to the higher margins derived from the ship chartering divisions as compared to the shipbuilding divisions.
Another interesting thing about Marco Polo Marine is that there is a high probability that earnings will increase moving forward. MPM is in negotiations to increase its OSV charter rates to reflect the market rates. As there is currently a shortage of OSVs serving the Indonesian market due to the cabotage law, MPM is in a strong position to negotiate for higher charter rates, which will eventually lead to a growth in its earnings. It was announced earlier this year that Jaya had lost charters for 3 out of 28 vessels of its fleet due to the Indonesian cabotage law. This bids well for MPM, as all of its vessels are flagged Indonesian. Moreover, I am more attracted by the shipping business of MPM, where its bread and butter is the operation of tugs and barges to support the coal industry in Indonesia. Its ship building and repair business only acts as a supporting division to its chartering division. Moreover, most revenues from its shipbuilding and repair division come from repairs itself, which is quite different from shipbuilding. In ship repair, it is a seasonal, but a non-cyclical business, as ships need mandatory maintenance and servicing. The company has found a niche in ship repair, where it targets medium and smaller vessels while larger peers like Keppel and Sembcorp target bigger vessels. It is said that MPM has long standing relationships with repeat customers which are estimated to form 60-70% of its shipyard’s topline. As such, I believe MPM’s business is more stable and recurring as compared to purely shipbuilders or ship charterers.
With attractive fundamentals, and growth catalysts in its OSV expansion plans, MPM appears relatively cheap to me at a PE ratio of 7.82 (excluding one-time gain), and at a PB ratio of 0.843.
There are undoubtedly risks though. New entrants into the Indonesian space would see supply of OSVs increasing, resulting in a drop in charter rates. In fact, Nam Cheong has already signalled its interest in this area by forming a joint venture with an Indonesian shipping company.
I read somewhere that currency risks are not an issue as a bulk of MPM’s sales are in USD. Thus, it is said to be USD neutral should my sources be reliable. However, one risk would be the deteriorating performance of MPM’s shipbuilding and repair segment. The shipbuilding and repair division has seen its revenue decrease in the last 9 months from $54.1 million in 9MFY12 to $25.8 million in 9MFY13.
The final risk would be the state of the shipping industry itself. Having bottomed out in 2008-2009, the industry still faces an oversupply of ships, causing many shipping companies to go bankrupt in the recent years. Fortunately, MPM’s business is protected from the oversupply of ships largely due to the Indonesian cabotage law. Nevertheless, a protracted slowdown in the industry or economy would undoubtedly affect MPM in one way or another.
Looking at the past insider trades, we find that the Chairman, Mr Lee Wan Tang, has been accumulating shares in the last few years, bringing his stake to nearly 60% of the company. Due to his significant stake in the company, I believe his interests are largely in line with the shareholder’s interest as well. His last purchase was at a price of $0.43, possibly indicating that the current price of $0.39 is undervalued.
I see MPM as a proxy to investing in the booming commodities market in Southeast Asia, especially in Indonesia. The company is still in a growth stage, and I am indeed excited for it.
Disclaimer: The author owns shares in the abovementioned company. The ideas expressed in this blog should not be construed as an enticement to buy or sell the securities, commodities or assets mentioned. The accuracy or completeness of the information provided cannot be guaranteed. Readers should carry out independent verification of information provided. No warranty whatsoever is given and no liability whatsoever is accepted for any loss howsoever arising whether directly or indirectly as a result of actions taken based on ideas and information found in this blog.