Marco Polo Marine Ltd - MANAGEMENT REPLY: When will its controlling shareholder relinquish the position of Chairman?

28/2/2014 - Marco Polo Marine Ltd has placed an order with SembCorp Marine Ltd to build a jack-up oil rig for US$214.3 mln.

The order is subject to shareholders' approval as it is worth more than twice the market capitalisation of the company.

The jack-up rig will be delivered in the fourth quarter of 2015, which is when Marco Polo Marine will pay the final instalment of 80% of the purchase price.

It will pay the first instalment of 10% immediately, followed by the second instalment of 10% in February next year.

During the quarter ended December 31, it borrowed S$50 mln under its S$300 mln Multicurrency Medium Term Notes (MTN) programme.

In the outlook statement on page 10 of the earnings report, the company said the money will be used for investment purposes that are complementary to its existing operations.

While it didn't elaborate any further on this in the earnings report, in the press release, the CEO said the company was looking for investment opportunities in the offshore oil and gas sector.

As a result of the capital raising, net gearing increased to 66.9% on December 31, from 60% a quarter ago.

With its latest announcement, it seems clear that Marco Polo Marine would use part of the MTN proceeds to pay for its maiden jack-up rig order.

And it is likely to raise more funds under its S$300 mln MTN programme for the same purpose.

The company recently announced earnings for Q1 FY14:

Revenue: +99% to S$30.1 mln
Profit: -28% to S$3.3 mln
One-off gains/losses: Nil vs S$0.7 mln
Cash flow from operations: (S$6.9 mln) vs S$6.2 mln
Dividend: Nil
Order book: Not disclosed

Revenue doubled due to more than 200% growth in revenue from ship-chartering business, accompanied by a 22% growth in revenue from shipbuilding and repair works.

The surge in ship-chartering revenue was because of contribution from a subsidiary in Indonesia acquired in Q2 last year.

The company also credited the growth in ship-chartering revenue to strong demand for Offshore Supply Vessels (OSVs) in the region.

It expects the chartering of OSVs to lead its earnings growth throughout the year.

Despite such robust growth in revenue, Marco Polo Marine Ltd's gross margin shrunk to 30.4% from 38.6% in the same quarter last year because of lower utilization of its tug boats and barges in Indonesia.

Not just the gross margin, the company's net margin also fell to 11.7% from 29.6% last year due to an 86% drop in other income, a 20% increase in administrative expenses, a 30% rise in other operating expenses and more than five times higher finance costs.

It said the administrative expenses were higher due to an increase in "personnel expenses".

Marco Polo Marine Ltd's income tax expense increased 51% in the first quarter due to higher profit from ship chartering in Indonesia which has a relatively higher tax rate.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. What is the shipbuilding order book?

In the earnings report, the company said the shipbuilding and repairs business is expected to remain affected by competition from shipyards in the region.

Despite that, it said, Marco Polo Marine Ltd's shipyard would stay busy as it meets the company's internal demand for OSVs.

In the absence of any further information, we wonder what could be the order book and how much of that comes from external customers.

Question

2. What investment plans prompted it to borrow S$50 mln via its MTN programme?

While it said the S$50 mln borrowings were for investment purposes complementary to its existing operations, in the press release, CEO Mr Sean Lee Yun Feng said:

"The offshore oil and gas sector in the region continues to exhibit strengths as seen through the rising charter rates for exploration and production vessels as well as those supporting these vessels. With the MTN program standing by, while working to lower the impact of higher interest cost, we are actively evaluating investment opportunities complementary to our existing offshore operations. This is the next phase of our corporate transition to a predominantly offshore oil and gas service provider as we act to generate another stable source of cash flow, earnings accretion that will continue to sustain our growth in the mid to longer term."

So, the S$50 mln borrowings are apparently meant for investments in the offshore oil and gas sector.

The latest announcement in relation to the oil rig order would suggest that this is where the money is going to go.

But a closer look at the earnings report shows, in the absence of the fresh borrowings, the company wouldn't have had enough cash to repay S$16.4 mln loans and finance its working capital needs.

Marco Polo Marine Ltd had negative working capital (net current liabilities) of S$28.4 mln due for repayment on September 30.

That makes us wonder how much of that S$50 mln will go towards expansion, as opposed to repayment of debt.

In essence, the Code of Corporate Governance 2012 has highlighted that the Board of Marco Polo Marine is not independent enough to protect the interests of minority shareholders.

Legally, Marco Polo Marine can wait for the deadline, which is still more than three years away.

But the minority shareholders would ask, why wait?

It has already been more than 18 months since the Code of Corporate Governance was released.

Is Mr Lee Wan Tang willing to step aside as the Chairman of the Board?

(Total number of questions in the full story: 11)

We have sent these questions to the company to invite them for an on-camera interview, and/or seek their written response.

The company advises investors to read the annual report and says material developments will be made public via announcements on the SGX-NET.

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