Otto Marine Ltd’s Down 9.5% Today – But Even More Pain May Be on the Way

Shipbuilder and offshore support vessels owner Otto Marine Ltd (SGX: G4F) saw its shares fall some 9.5% today to S$0.038 after the company made a curious announcement on Saturday morning.

As the Business Times reported, “a creditor had filed a court application to wind up the company over about US$1.2 million in debt.” In the official announcement regarding the matter, Otto Marine stated that it “is not disputing the Debt” and that it’s currently in negotiations with its creditor in order to resolve the issue.

This is an unusual development because Otto Marine’s latest financials (for the three months ended 31 December 2014) showed that it had some US$16.47 million in cash and bank balances and US$13.15 million in fixed deposits.

Its total borrowings might be high (some US$539 million worth of debt if we include finance leases), but it shouldn’t have been a problem for Otto Marine to repay roughly US$1.2 million in debt given its last-known figures.

We might never fully know what went wrong between Otto Marine and its creditor in question. But that could be the least of worries at the moment for investors of Otto Marine.

More trouble ahead

This incident with Otto Marine and its creditor has two important implications for the company.

Firstly, there’s the possibility that Otto Marine has seen a severe deterioration in its finances between 31 December 2014 and today. After all, if there had been the impression of some trouble in stumping up US$1.2 million, it does not take a giant leap of faith to wonder if the firm may be in some serious trouble.

Secondly, this episode might still indirectly wreak some havoc going forward even if there’s 1) nothing wrong with Otto Marine’s business in the first place, and/or that 2) the firm actually has legitimate reasons to not repay the borrowings in question.

I have to make clear that Otto Marine is currently nowhere near being insolvent as it has shareholder’s equity that’s worth some US$263 million as of 31 December 2014. But, the firm has the potential to run into liquidity problems.

As my colleague John Maxfield describes, liquidity issues happen when “creditors lose faith in a company and stop accepting its assets as collateral for lines of credit.” As of 31 December 2014, Otto Marine has US$135.1 million worth of borrowings from financial institutions and US$307.4 million in trade payables that are due by 31 December 2015 (or could be called back easily by that date).

If Otto Marine’s other creditors (both the financial institutions and the suppliers that are owed the trade payables) lose faith in the company because of the paltry US$1.2 million in debt that sparked the furore, it could easily result in some messy liquidity problems for the firm given its less-than-stellar (though certainly still solvent) balance sheet.

A Fool’s take

At Otto Marine’s current price, it looks like a really cheap share given its price-to-book (PB) ratio of just 0.46. For some perspective, the SPDR STI ETF (SGX: ES3) – an exchange-traded fund which tracks Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – has a PB ratio of 1.4 at the moment.

But, given what we’ve seen – the possibility of a seriously deteriorating business over the past few months and/or the potential for liquidity issues – Otto Marine’s share price may see even more pain down the road.

Existing shareholders of the company and bargain hunters who are interested in the firm by virtue of its cheap valuation would need to be cognizant of the risks involved.

To add some twists to the issue, here are some interesting facts:

  1. Otto Marine revealed in a seemingly separate announcement, also made on Saturday morning, that a similar winding-up court filing has also been made against Go Offshore Pty Ltd. Go Offshore Pty Ltd is a wholly-owned subsidiary of Go Marine Pty Ltd, which happens to be a subsidiary of Otto Marine. This time, the sum claimed against Go Offshore by an unnamed creditor amounted to only US$118,000.
  2. At 6:20pm today, Otto Marine made an announcement that it has “fully paid up” the debt of around US$1.2 million that made its creditor want to take the company to court. In response, the creditor has decided to withdraw the winding up application against Otto Marine.

Investors of Otto Marine might want to keep a close watch on new developments, if any, in this whole saga.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.