Ian Hartley clearly buys into the adage: stick to your knitting. “Some of our competitors have widened the scope, but we will continue only to be shipbrokers. For the foreseeable future, we believe that’s the only way,” said Hartley, finance director of ACM Shipping, a London-based shipbroker with a £26.26 million ($50 million) market capitalisation.
Founded in 1982 and listed on London’s Alternative Investment Market since 2006, ACM, like many in its sector, has faced an uphill battle being just a broker. There was a boom of ships ordered before the financial crisis that are just being filled today. That means there is a huge supply of ships without a corresponding increase in demand.
With more than 150 shipbrokers worldwide, ACM is aggressively expanding its operations in Asia, specifically in Singapore, Beijing and Shanghai, where growth is still possible. ACM has also broadened its offerings. Previously, it focused on wet cargo, primarily oil, but in June 2010, the firm acquired Australian shipbroker Endeavour for two reasons: to gain a foothold into the lucrative dry cargo market and to increase its Asia-Pacific focus. By diversifying its operations, ACM sought to take advantage of cross-fertilisation, as many ship owners possess ships that are both wet and dry.
The A$10 million ($10.2 million) acquisition was a 60% stock and 40% cash deal, with A$4 million in cash and 1,815,000 new ordinary ACM shares being exchanged. Most importantly, the four key staff members of Endeavour, including CEO Terry Karadanais, joined ACM and were incentivised with a bonus scheme to remain at with the parent firm for five years. “This takes a lot of risk out of the acquisition because it ensured that the biggest asset we were buying was the people, and the four most important people were very heavily locked in to ACM,” said Hartley.
Today, ACM has 10 brokers in London focusing on dry cargo and they have set up a dry cargo desk in Shanghai as well, with a dry cargo desk in Singapore due to open this month.
Though Hartley is pleased about the potential for the recent acquisition, because dry cargo rates have dropped and the US dollar has strengthened since the purchase, “from a financial point of view, it’s not been quite so successful”.
Dry cargo is “probably less than 10%” of ACM’s business right now, but Hartley is confident that “it could be 50% in time,” not specifying when because of today’s depressed shipping rates.
Hedging
Hartley’s hedging decisions are forex-focused. “We are very exposed to currency, in particular the US dollar. Approximately 98% of our income is in US dollars. Being a UK-based company, the majority of our expenses are in sterling. But Australia is another core centre for us, so we are obviously exposed to the Australian dollar. That is our main exposure in terms of what we might hedge,” said Hartley.
“We do a mixture of forward contracts and spot business. We try and keep it simple. We cannot use some of the more fancy, dare I call them, hedging strategies. By using forwards and spot, we keep it simple. By doing that, you can get 90-odd percent to where you want to be in covering your risk. We tend to cover forward quite a bit, but relatively short term. We don’t tend to go beyond six months.”
ACM’s focus on brokering deals rather than owning its own assets means that the firm can protect itself during downturns. Hartley said: “We don’t have the same risk as many businesses because we are just brokers. We put the two sides, the ship owner and the charterer, together. We don’t have the full risk. We only have the commission risk, and we try to chase that up as soon as possible.”
Hartley’s role as a risk manager is made easier because as pure shipbrokers who don’t take positions, ACM avoids many problems that come with ownership. Approximately 80% of ACM’s costs are directly tied to people. “Compared to nearly all other shipping companies, we have much less risk. Our overhead base is very flexible in that so many of our costs are people-related, but more importantly our employees are very heavily incentivised, particularly senior brokers, based on the level of business that they and the company do. At times when the company is not receiving so much income, we have an almost automatic control on our overheads, meaning that we can stay profitable even when shipping rates are low.”
However, Hartley admitted that ACM’s revenues can rise and fall based upon factors that are beyond its control. “Unlike most businesses, we can’t set our own pricing policy, so it’s governed by shipping prices. When oil prices are low, you expect the world economy to do well, and therefore we will gain more business that way. Short-term movements don’t affect us much at all.The world demand for oil is increasing and is now higher than it was pre-recession, but there are more ships too.”
Asked if ACM views home-grown Asian shipbrokers as a threat to his business, he said: “We see opportunities in Asia. We don’t see Asia as a threat.” Furthermore, ACM has hired local shipbrokers in India and China who have performed well for the firm. “We brought three people over from India who trained in London to learn the ACM way and then went back to Mumbai.”
So what is his outlook? He said we can expect it to be difficult for the next year or so. But it’s unpredictable. “It’s something we can’t control so we are ensuring our fundamentals are in place,” he said of the market. Such sage advice is applicable to any industry.
This story was first published in the November 2011 issue of FinanceAsia magazine.
