Jordan Lipson, Portfolio Manager of the Cromwell Phoenix Global Opportunities Fund
The Cromwell Phoenix Global Opportunities Fund added 2.1% in absolute terms over the March quarter, outperforming global indices large and small. Nam Cheong Limited (NCL) was the biggest contributor, rising meaningfully as investors become more comfortable with its post-bankruptcy future. This article delves into NCL’s journey, its strategic partnerships, and the factors contributing to its compelling risk/reward opportunity.
Almost 70 years ago, a 14-year-old Tan Sri Datuk Tiong Su Kouk (Tan Sri) was given 3.40 Malaysian Ringgit (less than AUD 2) to start a career as a fishmonger. A hard work ethic and a focus on customers ensured early success. In his 20s, Tan Sri saw the benefits of technology from Japan, in particular the newly discovered food freezing technology. Malaysians were initially unwilling to trust that frozen food would be edible, so Tan Sri gave out frozen food for free to convince customers to buy his produce. This innovation led to the creation of CCK Consolidated, a vertically integrated leader in frozen foods in Malaysia, which is still in business, controlled by Tan Sri and listed on the Malaysian Stock Exchange. Staying close to the seas, Tan Sri subsequently partnered with Chinese shipbuilders to start a business known as Nam Cheong Limited (NCL).
NCL today is the owner of 36 offshore support vessels (OSVs) which service the Malaysian offshore energy sector. Running NCL has been anything but smooth sailing. The company built and acquired as many boats as it could during the last offshore drilling boom, heavily relying on debt, much like others in the industry. This business is exceptionally cyclical and NCL was forced to initially restructure its debt in 2018 to meet payments to creditors. Whilst business was hardly thriving, things somewhat steadied, until the COVID-19 pandemic caused oil prices to retreat and cripple the OSV business.
This led to NCL declaring bankruptcy. Share trading was halted, and negotiations began with lender banks. With a recovery on the horizon, after meaningful negotiations, the final restructure agreement was signed and approved on 1 March 2024. Under the terms of the deal, much of the debt would be converted to equity, Tan Sri would provide more capital to the business in return for new equity, and the remaining debt would be converted into “equity friendly” liabilities, to be repaid over an extended period at below market interest rates.
Phoenix has followed the OSV market for some time, with the domestic Cromwell Phoenix Opportunities Fund initially investing in MMA Offshore (MRM). This investment was a significant contributor to performance as it eventually received a takeover bid at a robust valuation. This portfolio has also successfully invested in industry leader Tidewater (NYSE:TDW) previously. Both these investments provided relevant background for assessing NCL upon its restructure and eventual relisting on the Singapore Stock Exchange. In particular, valuations could be more precisely assessed using the independent expert’s report associated with MRM’s takeover.
What happened next?
Upon relisting, NCL’s shareholders included the banks who had converted their debt to equity, prior NCL investors who had been diluted and were forced to hold their shares through bankruptcy for 4 years and Tan Sri, who was unlikely to trade his shares. Unsurprisingly, the banks were large scale sellers upon relisting, trying to recoup some of their investment as quickly as possible. Furthermore, any potential buyers would have to assess both complex financial statements and detail provided in the bankruptcy documents to gain an understanding of the current state of the NCL business.
Despite the rocky history, the truth was that business was booming. As a result of the cyclical downturn in the sector, the number of OSVs in operation had shrunk materially and there was no prospect of any new vessels being built, given that day rates were less than half of what was needed for newbuilds to break even. Further aiding NCL is Malaysian law, which preferences Malaysian-flagged vessels for Malaysian offshore activities, which are dominated by state owned enterprise, Petronas, which has increased activity in recent periods. NCLs fleet is also (almost incomparably) young at just over 7 years old. NCL’s current financials are encumbered by existing contracts, which were set at historic day rates. Profitability is likely to improve when these contracts conclude, and pricing is reset at current market rates.
Upon relisting, NCL traded at less than SGD 0.15 per security. Sadly, we missed this initial opportunity, however after assessing the detail of the transaction, we initially purchased a stake in NCL at SGD 0.365 per security. Using somewhat conservative estimates, NCL’s market net asset value (NAV) was assessed to be at least SGD 1.30, making this opportunity appear highly attractive. It is worth noting that NCL is not at all promotional, continues to have (temporarily) complex financials, and does not provide market updates beyond legal requirements.
Tan Sri does however have a history of solid governance and has demonstrated care for stakeholders, so we were happy to partner with him over the medium term as NCL’s value became evident. This has occurred more rapidly than anticipated, with NCL finishing the period at a share price of SGD 0.66. We sold some of our holding in NCL during the quarter as the risk/reward proposition has now become less compelling and to limit position sizing given the volatile nature of the OSV sector.
Cromwell Global Opportunities Fund
Value of $100 invested at inception
Past performance is not a reliable indicator of future performance
Conclusion
At period end, NCL remains a top 5 holding as it continues to trade at a substantial discount to NAV. Recent market updates have been mixed, with the global OSV industry somewhat slowing due to the decline in the oil price. However, Malaysian competitor Keyfield Services recently released a strong result and provided an optimistic outlook statement. In particular, Keyfield stated “based on supply and demand analysis of OSVs in Malaysia, there will be a critical shortage of AHTS < 80MT beyond 2030, unless owners acquire new vessels”. These vessels represent the majority of NCL’s NAV. There is no doubt NCL operates in a cyclical industry which has seen countless bankruptcies over time, so an investment is not without risk. However, with a young fleet, market tailwinds, extremely shareholder friendly debt and an aligned controlling shareholder, NCL still represents a compelling risk/reward opportunity.
Cromwell Global Opportunities Fund Performance
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