I bought Courage Marine on 3rd November 2008

About Courage Marine

Courage Marine Group Limited is a relatively young and small dry bulk shipping company serving mostly in Asia and Russia. It currently run about 10 carriers, consisting mainly Panamax and Hanysize series. It transports dry bulk commodities such as coal, cement, iron ore, minerals and wood chips.

Uncle must be crazy I - logical analysis

Dry bulk shipping demand is tied quite closely with demand for commodities. With the bursting of the commodities bubble, the dry bulk index (which measures the demand for shipping capacity vs the supply of dry bulk carriers) had practically collapsed (from a high of above 11,000 sometime in May 2008 to just over 800 now). In fact, shipping rates have fallen below the cost of running the ship!

It might seem surprising, why then did I raise cash to buy into a sinking ship? The reason is actually very simple. Shipping is known to be highly cyclical, with huge trough-to-peak fluctuation across boom bust cycles. Since, shipping is at its doldrums now, what better time than now to buy something at its fundamental bottom (or rather, somewhere near the bottom).

The following chart compares Courage Marine's share price with BDI index for the last 5 years. It can be seen that Courage Marine's share price (top chart) tracks BDI index (bottom chart) quite closely. The former can easily be a proxy purchase of the BDI index.



The BDI index is 829 as at 7th November 2008, just another 829 points to go before shipping becomes free. Thus I would assume that the current share price of Courage Marine already factored in the current depressed shipping rates.

Uncle must be crazy II - fundamental analysis

If I'm so sure I am getting in near the bottom of the shipping cycle, what makes me think Courage Marine can survive until the shipping boom? There are several strengths in Courage Marine that I see could help it ride out this winter:

1) Debt free shipping play:

The current economic crisis centres around a severe tightened credit atmosphre where banks are not willing to lend to businesses and are driving financing cost sky high. While many shipping firms are highly leveraged and any failure to refinance their debt will mean their demise, Courage Marine on the other hand consistently maintained a healthy balance sheet with net cash position. Courage Marine can practically hibernate without much of a problem.

2) Second hand vessels:

It is part of its business strategy to acquire and run only second hand vessels. While these vessels have higher operating and maintainable cost, the group can count on the experience and expertise to keep these cost low. The lower capital cost of investment required and resultant lower depreciation of these vessels resulted in higher profit margin. It is the aim of the management to renew its fleet with younger second hand vessels when the opportunity arises. Given its healthy cash horde of about USD 54.8 million (or about 7.5 SGD cents per share) after taking into account recent acquisition and disposal of vessels, they are in a good position to acquire new and good vessels should a fire sale by other shipping firms occur.

3) Small and nimble

By industry standards, Courage Marine is a very small player with less than 10 vessels. They could easily ride on excess demand via spot market or idle their ships when demand plunge suddenly like the current situation.


Conclusion

As I had said in earlier post, I would try to avoid leveraged businesses until this credit storm blows over for fear that they are unable to secure debt refinancing. I had already averaged into First Ship Lease Trust and that's about the maximum risk I'm willing to take.

The current stock market tumoil continues to open up opportunities to buy into sound businesses at attractive prices and acquiring Courage Marine to take advantage of the eventual trough-to-peak flunctuation in shipping cycle is just the beginning. I am still waiting for my year end bonus, if any, to continue my buying spree.