Over the past 12 months, the Straits Times Index (SGX: ^STI) has gained 9.5%. But, investors in these three companies; Vard Holdings (SGX: MS7); Otto Marine (SGX: G4F); and Manhattan Resources (SGX: L02) weren’t able to participate in the market’s climb. Instead, those three shares had fallen by more than 40% as seen in the chart below, causing their investors plenty of pain. Bargain hunters might view their declines as a buying opportunity but on the other hand, those shares might just turn out to be traps. Source: Yahoo Finance Either way, let’s see how their businesses…
Over the past 12 months, the Straits Times Index (SGX: ^STI) has gained 9.5%. But, investors in these three companies; Vard Holdings (SGX: MS7); Otto Marine (SGX: G4F); and Manhattan Resources (SGX: L02) weren’t able to participate in the market’s climb.
Instead, those three shares had fallen by more than 40% as seen in the chart below, causing their investors plenty of pain. Bargain hunters might view their declines as a buying opportunity but on the other hand, those shares might just turn out to be traps.
Source: Yahoo Finance
Either way, let’s see how their businesses have done so far.
Vard Holdings was known previously as STX OSV and got the name change after Italian oil & gas company Fincantieri bought a controlling stake in it on Jan 2013. Vard designs and builds vessels used for the offshore oil & gas industry.
The company has seen difficult times lately. In 2012, its profit had dropped by 43% from the previous year to NOK 902m. Earlier this month, when it released its second quarter results, profit for the half-year continued the trend by falling 69% to NOK 168m.
The future outlook for the company does not look especially bright as well, given a steadily decreasing trend in its order book. The order book’s value has declined from NOK 22.4b in 2008 to NOK 13.95b as of 30 June 2013 and a smaller order book would mean lesser revenue in the future.
But, Vard’s management actually sees a bright spark as they are “confident about the prospects for new orders for the remainder [of 2013]” due to a growing need for their type of support vessels to compliment subsea work when drilling for oil.
So, there’s a chance that the situation can get better. In any case, the fall in profits and the uncertainty over the future of its business would likely have contributed to the company’s share price decline of 48% since last July.
Otto marine is another shipbuilder for the offshore oil & gas industry. It has faced even tougher times compared to Vard recently; Otto has logged cumulative losses worth US$126m for 2011 and 2012.
It managed to post a profit of US$1m for the first quarter of 2013, an improvement over the US$8.3m loss it suffered a year ago. But, the profit came from a pitifully slim net profit margin of only 0.8%. Healthy businesses don’t come with such slim margins.
Management continues to see challenging conditions in the general environment for the shipbuilding industry with its own shipyards being underutilised. In a similar vein to Vard, poor results as well as a gloomy outlook have probably combined to cause Otto Marine’s 45% drop over the past 12 months.
Finally, we come to Manhattan Resources, which has fallen by 42% from July last year. The company provides management services to other companies involved with shipping, property development and lumber products.
Manhattan has been bleeding money recently, seeing red ink to the tune of S$22.1m for its last two completed financial years. Recent first quarter results for 2013 were not any better as the company lost S$246,000 for the quarter.
In the first quarter earnings release, management still sees “uncertainty over the global economy”, which will add downward pressure on margins and profitability.
Foolish Bottom Line
It should be fairly easy to see a simple common thread tying these companies together (hint: they are all facing business difficulties).
As it is, loss-making as well as shrinking businesses lose value over time, which eventually gets reflected in the share price.
These three businesses might yet turn around – there’s always such a chance – but buyers have to know what they’re getting themselves into. Not every share that falls automatically becomes a bargain.
Charlie Munger, long-time sidekick of American billionaire investor Warren Buffett, once told others to “tell me where I’m going to die, that is, so I don’t go there”. On that front, knowing that companies with poor business results generally makes for bad investments would be useful in demarcating a general “death spot” for investors to avoid.
Click here now for your FREE subscription to Take Stock Singapore, The Motley Fool’s free investing newsletter. Written by David Kuo , Take Stock Singapore tells you exactly what’s happening in today’s markets, and shows how you can GROW your wealth in the years ahead.
The Motley Fool’s purpose is to help the world invest, better. Like us on Facebook to keep up-to-date with our latest news and articles.
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Chong Ser Jing doesn’t own shares in any companies mentioned.