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.

Lost $1m and left with $4.2m. What should I do? (Part 2)

Here is part 2 of the email exchange:

Hi AK,

You may publish my correspondence without my email address.

To help you help me more, these are the answer to your questions:

1. I invest or speculate for the sake of making double what i take home every month, over the last few years, i actually make 40k a month from market when timing is good.

2. I would like to do what you do as a income investor, but i just cannot get over the fact that you actually allow your buy price to drop and continue to average down during a crisis. that does not make any sense to me.

3. that is why i resorted to punting hit-and-run style of most time the last 7 years as a speculator. but now that i got slap twice both on the left and right cheek, it seems pointless to continue this style of punting in market.

So i hope to revert to the income generator like you. Just wondering does all income dividend player ignore dropping share price? I need to know, because I cannot seems to get over the fact that if i didn't have entered the stupid market, i would have another 1mil more in my bank account. This pain, till to date, i am feeling it inside me, without anyone knowing. really felt like a loser but can't show it.

AK's reply:

Hi L,

It is all in the mind. :)

If I am interested in the income an asset is generating for me, if the price drops but the income being generated is the same as before, why wouldn't I buy more of this asset? If the asset has a life of decades and is able to make money for me for decades, what is a paper loss of 10% or 20% in the short term? I am still being paid dividends regularly.

However, if we can avoid losses, we should. This is why entry prices are important. Like I said before, we don't want to overpay. Bear in mind that even if we pay a fair price or a price undervalued, price could go lower. We cannot explain Mr. Market's moods. We can try, of course.

I do a bit of trading myself. So, I understand the pain you feel from your trading losses. I did a bit of speculating as well but I am not a very good speculator. So, I have lost money too.

In the end, I settled for what works best for me. It is a journey of self discovery. You will have to discover for yourself what suits you best too. To me, if it gives me peace of mind, it cannot be too far from being right. :)

Best wishes,
AK

Related post:
Lost $1m and left with $4.2m. What should I do?