Introduction to Courage Marine

Courage Marine was one of the stocks that I actively traded during the boom time of 2007 and 2008. My last purchase price for Courage Marine was 44 cents which coincides with the peak of the Baltic Dry Index. Since then, the stock had dropped by more than 50%. Price as of 31 Jul 09 is 23.5 cents. Even so, I attribute this to my error of trying to time the market and got myself burn. I am still holding onto this stock, as it has a sound business model and good management despite being in a volatile industry.

A general background of the company

Courage Marine deals in the marine transportation industry. It is a dry bulk carrier group which owns and operates 8 dry bulk carriers that transport raw materials for Asia's growing needs. Its fleet is deployed around Greater China, Japan, Russia, Vietnam, Indonesia, Blangadesh and elsewhere in Asia.

The vessels transport mainly dry bulk commodities such as coal, gravel, cement, cement clinker, iron ore and various minerals. One can observe that these are the basic materials required for development and is closely related to the global economic state. The fleet that company has contains, Handsize, Handymax and Panamax vessels.

Competitive Strengths of the company

In basic terms, these groups of vessels belong to the smaller class size as compared to large ones called the Capesize. The advantages of owning a smaller group size of fleet means that it gives the management more flexibility in optimising the transportation requirements to ensure full optimization of the available Deadweight Ton. In layman terms, the company ensure that every time the ship set sail, it will be loaded with the max tonnage so as to maximise the ship capacity. This is extrememly important given the volatility of the industry. It is very important to stay lean and flexible without comprising on the optimal deployment of the Group's fleet capacity.

Externally, the group has extensive presence in the Asia region meaning that it will be able to tap on to the economic boom for this promising and developing region. The group will be well placed to meet increases in the existing customers and potential new customers transportation requirements.

Internally, the group has a strong operating cash flow and a net cash position providing opportunities for the company to acquire vessels for its expansion plans.

The company comprises of a strong management team that has beening running the company in a efficiently and this is clearly the case as the company has been listed as one of the World's Top 10 Shipping company for the 3rd year in a row. This recognition reaffirms the group position as a strong and consistent performance among the world's 100 shipping firms. It also shows credibility towards the Group's asset light business model that is built on diligent cost management and prudent expansion policy.

Key downside risks

Path to economic recovery will be the key factor determining how fast the company can come out of the wood. Referring to my previous post on the dry bulk industry, one will be able to know what are the main factors affecting the valuation of companies in this industry.

Why am I still holding onto this stock?

One, it has a proven track record. Though it posted a net loss in the 1Q09, when one look at the Financial Year since the company was incepted, it has never made a loss and despite the economic downturn that plague the global economy, the company has continued to issue dividends, creating shareholder value.

Secondly, its accolades speak volume of this company. So right now, I will continue to accumulate shares of this company using the dollar cost averaging method. I hope this sleeping monster will awake soon.

Dry bulk shipping

Today I will be discussing about the dynamics of a lesser-known industry. Dry Bulk shipping. The reason why I am bloggin about this is because understanding of this environment is a key factor in understanding how one of my stock, Courage Marine will perform in this industry.

To begin with, while most of Singaporeans associate shipping with containership, there is the less visible of shipping aspect known as bulk shipping. The bulk shipping forms a major aspect of the shipping industry and today my blog is to present an insider guide to the world of bulk shipping.

By definition, bulk shipping involves the carriage of cargo which constitutes raw materials for industrial purposes. The quantities involved are huge in nature so shipping them on bulk carriers present better economies of scale. Examples of bulk cargoes are iron ore, coal and grain for dry bulk.

To put things in perspectives, 70% of world's transported goods are seaborne. Drilling further into seaborne transportation, dry bulk and wet bulk each account for 40% of the total pie while the remaining 20% is made up of bread bulk, general and containerised caroges.

The components of the dry bulk comprises of:

50% iron ore, scrap iron, coking coal and steel products

20% steam coal

10% grain

20% minor bulk (minerals, forest and agricultural products and fertiliser)

Bulk shipping delivers practically all the raw materials to industrial and population centres of the world to feed manufacturing process and support production of food, infrastructure, building materials as well as deliver energy in the form of fuel. Though not commonly visible, these dry bulk cargoes affect the daily lives of everybody globally.

Pricing of dry bulk cargoes comes in the form of bulk shipping contracts that is determined on a daily basis and the rates contracted here are being watched as one of the leading barometer of the state of bulk shipping market.

The Baltic Dry Index which measures the demand of dry bulk shipping capacity versus the supply of dry bulk carriers has grown so much that the value of the index is being accepted as one of the world's leading economic indicator. The reason for the unprecedented rise in the BDI over the last couple of years can be attributed to the following factors:

a. Insufficient new ship deliveries to match growing demand

b. Severe port congestion in major dry bulk ports of loading and discharging. Resulted in extended occupancy, making them idle off the port and creating a severe artificial "shortage" of ships

c. Economic growth in Brazil, Russia, India and China

d. Changes in trade patterns involving longer distances between loading and discharging port, thus exacerbating the problem of artificial "shortage"

HOWEVER, the onset of the global financial crisis resulted in a steep decline in the BDI. Ever since, the industry has struggled to find its footing again. The challenges remain and the strategies adopted by the ship owners include:

a. Supply of ships Right now, there are too many ships chasing too little cargoes. It pays to reduce the supply of ship in order to strike a balance between supply and demand. Even so, the momentum of ship building has been rampant and it is not as easy to cancel the order. But some of the solutions to reduce the supply of ships will be: laying up of un-economical ships, scrapping of old ships and deferring the delivery of new ship building and worst case scenario is to cancel new ship building order if conditions remains bearish.

b. Cash Owing to the circumstances now, cash is King. All business owners are busy managing cash given its severe shortage due to tightening liquidity. Some strategies to manage cash include: heightening monitoring of counterparty risks, timely collection of freights and hires; tightening up on ship management procedures to curb waste; managing price volatility of their fuel oil exposure by purchasing forward contracts if opportunities permit; hedging on forward exposures and restructuring their capital base

c. Trading Pattern Due to changes in trading patterns, different bulk carriers are moving into new areas of carriage. Some ship owners are relocating their ships at their costs to other geographical areas in search of better value but such a move might reduce the comparative advantage after one factors in the cost of making such a transfer.

The best strategies at the moment is for ship-owners to identify the particular sector that offers the best promise and adopt strategies to extract value. The market is made up of pessismists and optimists. The pessimist group will remain long on cargo at current day levels as they hold the view that markets will ease. Correspondingly, the optimist camp would long on ships with the view that the market will turn bullish again.