Nam Cheong shareholders, calm down! This movement in the Bf Gf portfolio isn’t due to any bad news but for personal reasons. Before, I go into that, let me just give a really brief intro about this company, for the sake of investors hearing this stock for the first time.
Nam Cheong is in the business of building and selling a variety of Offshore Support Vessels (OSV) used for the shallow-water drilling industry. According to analyst reports I have read, shallow-water drilling requires oil prices of $25-50 to break even whereas deep water drilling requires $70 and above to break even. In this aspect, you can more or less be glad that the fall in oil prices may not impact Nam Cheong so hard. From this recent report I chanced upon, it seems like even Keppel Corp is relying on shallow-water drilling to tide them through these tough times.
What drew me to Nam Cheong in the first place was its ambitious and aggressive methods of chasing growth. They outsource their OSV to be built in China shipyards first before even receiving a confirmed order so as to deliver it fast to their clients. In other words, they try to predict the market and construct the OSV first before winning purchase orders.
They are the biggest OSV builder in Malaysia and have entered a joint venture with Marco Polo Marine, in which Nam Cheong will own a 50% stake in Marco Polo Marine’s ship chartering subsidiary.
As you can see from the chart above, Nam Cheong was doing well before the oil crisis. It’s earnings were growing at a rate of 40% from 2011-2014. It seems that their strategy is paying off. Recently, they sold 2 more OSVs on 11 March 2015, netting them $58M in revenue. This will contribute to the group’s earnings in FY2015-2016. According to analyst’s coverage, they are left with 15 out of their targeted 35 vessels to be sold this year. The company seems confident of their growth which is demonstrated by their share buyback of 1M shares at the price of $0.30 on 9 Dec 2014.
Reasons for Divestment
I divested a significant portion of Nam Cheong today at a price of $0.32, representing a realised loss of about 9% after taking into account dividends received. I managed to receive a dividend yield of about 4% from Nam Cheong this year. I am still holding some shares as their fundamentals haven’t changed and this divestment was done to recognise the risks involved in this business and to reallocate capital accordingly.
Here are my thoughts:
– Again, coming off a back of an overconfident streak in early 2014, I had dumped in a significant portion of my capital into Nam Cheong after a lucky Jardine C&C trade. In 2015, as my mind clears, and when I look back, I cannot imagine why I would over-allocate so much money into such a high risk business. I have exposed myself to over-allocation risks.
– Nam Cheong’s aggressive business model uses a lot of debt to fund the construction of OSVs before they even have a confirmed purchase order. This again, is a form of risk that must be recognised. If they fail to predict correctly, their finances will suffer.
– When the oil crisis hit, it seems like no expert managed to predict it, which left me wondering… how good can Nam Cheong’s management ‘predict’ demand? ( But then again, I am not an industry insider so I probably should not make such smart-aleck comments.) Luckily, shallow-water is said to be more resilient as costs are lower and you do not need as high a price to break-even. Even then, drilling activity seems muted. Again, this point is related to the previous one.
– The oil industry is exposed to cyclical risks. Why would I put so much money into a business that is at the mercy of cyclical macroeconomics? Even if the rest of my stocks do well, a major down cycle like this one would affect my overall portfolio returns due to the large percentage holding in this stock. Perhaps I should have thought of that before I invested. Back to the first point.
– I am unclear about the long-term demand for shallow-water drilling. It seems like deep-sea drilling is the future, according to general consensus, (the Gf works in this industry! But feel free to give me your thoughts in the comments section below!) We shall have to see how the company can adapt to shifting demands in the future.
This small loss is I lesson I pay for overconfidence. I still have a small-medium stake in Nam Cheong. I will definitely be watching this company closely. Whether it goes up or down, I think this current decision is sensible in light of my portfolio strategy. The amount of money divested from this will be plonked into a more stable, dividend-growth stock, which will better balance off the risks mentioned above.
Fellow investors must be wondering: “This bugger buy/sell so many times in so few months! No patience!” Don’t worry, I can assure you that after most of this portfolio restructuring is done, portfolio action will mostly be confined to – Buy. Hold. Buy. Hold. Buy. Buy. Buy. Hold. ( If my cashflow allows! Hopefully I won’t ever need to sell.) I have one more stock left to partially-divest to better balance the overall risk… but that can wait for now.
Since writing this article, I have already bought a new stock and plan to buy another one later when the market reopens.
If you wanna be a kaypoh to see which 2 stocks I bought, like The Bf Gf Money Blog on Facebook or subscribe by entering your email below 🙂