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Thursday, November 27, 2014

MARCO POLO MARINE: Should I Cut Loss Or Continue To Hold?


Written by Henry Tiong
Thursday, 27 November 2014 06:30

Henry Tiong says he is an average Singaporean in his early 30s, has a full-time job, is happily married and caught within the sandwich class. He lives in an executive condominium with a "mountain-like mortgage". "My goal is to achieve financial freedom as early as I can. My target is 45 years old. I don't mind working but I hope to provide my wife an option not to work." The following article was recently published on his site and is republished with permission.

IT IS EMBARRASSING but I have to admit I bought Marco Polo Marine after looking at another local investment blogger's analyses on it.

This was back in Dec 2012 and the price was 42 cents when I bought it.

One of the investing lessons is to always create one's own investment thesis through doing one's own homework - not from hearsay or from analysts' reports. However, I did not heed my own beliefs and to be fair, the analyses were well written and the blogger is reputable, so I jumped straight into buying some shares. No blame should be put on the blogger, it is mine and mine alone.

Marco Polo Marine had a stellar FY 2012. After-tax earnings topped $21 million which was a 23% increase from the previous year. This worked out to be 6.3 cents per share. Marco Polo Marine was trading at just under 7 times P/E multiple.

Net asset per share was 41.4 cents, which just about matched the price I paid for. The forward-looking story appeared intact - Indonesian cabotage law kicking in and presented a great opportunity for Marco Polo Marine which has indonesian ship-chartering operations. The macro picture makes sense.

FY 2013 was good too. EPS creeped up to 6.56 cents per share and NAV to 47.8 cents per share.

There were warning signs though - one time, non-recurring gain on equity interest of $5.9 million (BBR), a significant rise in interest expense from increased borrowings, a huge impairment loss of $1.1 million in trade receivables.

There were indications from management's commentary that the ship building & repair operations may not hold up as well as initially thought under "subdued economic conditions".

The share price remained subdued at 38 cents for much of 2013.

FY 2014 was downhill all the way

Marco Polo Marine (30.5 cents) has a market cap of $102 million and trailing PE of 8.6X. Chart: FT.comQ1 earnings dropped 28% to 0.95 cents per share compared to the previous corresponding period. One thing grew in that period - borrowings.

Q2 2014 managed to outdo Q1 by recording an earnings figure that was 72% lower than previous corresponding period. On a half year basis, earnings were down 57%.

Q3 2014 continued the free-fall trend, reporting earnings that were 53% lower than previous corresponding period. 9 months earnings down 63%.

Full year 2014 just finished things off with a Q4 earnings figure that was 40% lower than the previous corresponding period. Overall FY 2014 earnings were 59% lower than 2013's.

Rightfully, the price followed suit, moving from 38 cents to 30 cents (a 27% drop).

Could I have avoided this blood bath?

If I had followed my own investing guidelines, I would not have bought into Marco Polo Marine. I should also have cut loss earlier based on the warning signs. But I was bird-watching and caught out by Mr Market.

Dividend track record is shallow since 2011, and the yield is low at 1.2% (at time of purchase).

I prefer to buy stocks that has net cash. 2012's balance sheet showed that Marco Polo Marine had $16 million of cash and cash equivalents, which is a fraction of the borrowings total of $54 million.

Hindsight bias I know. =) Anyway, since I am already vested, should I cut loss or continue to hold?

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