Penguin International

[dydx]

Shipbuilding is generally looked upon as a cyclical business, but when a shipbuilder has a whole range of its own models that serve a multitude of end customers/industries, there could well be an overall stability in the business.

Revenue
2014 - $165 million
2015 - $120 million
2016 - $33 million

A quick check - Penguin experienced revenue reduction of 80% from 2014 peak to 2016 trough. How can there be stability in the business. This company is highly cyclical. And I have yet to check the frequency of the shipbuilding cycle. But from what I heard, shipbuilding is typically 7 years of downturn and 1-2 years of upswing.

Then again, money can be made from cyclical companies, whether it is through tangible assets or free cash flow valuation.

Don't just rely on Penguin's raw revenue numbers and jump to a conclusion on Penguin's actual business volume in a particular FY or quarterly accounting period, as the revenue number does not capture the disposal of boats held under its charter fleet which is actually a normal business activity for Penguin.

The fact is that Penguin has managed, in the last few FYs, to dispose of most of its older crew boats and ferries under its charter fleet, which has been substantially renewed with its own newer design crew boats commanding higher charter rates. We should also note that when Penguin sells a boat - whether a fully-depreciated old crew boat or passenger ferry, or a relatively new crew boat - from its charter fleet, in accordance with the existing accounting policies, the sale proceeds (which can be in cash against delivery or regular instalments under a deferred payment plan) will not be captured as a part of revenue but instead in the cash flow statement under proceeds from disposal of PPE, and any profit from the disposal will be captured in the P&L under other operating income. As Penguin's charter fleet has been expanded to meet demand from the oil majors customers, the existing accounting treatment for any eventual sale of the boats from its charter fleet tends to understate the actual cash proceeds or cash flow coming into Penguin's bank accounts and B/S.

[money]

Shipbuilding is generally looked upon as a cyclical business, but when a shipbuilder has a whole range of its own models that serve a multitude of end customers/industries, there could well be an overall stability in the business.

Revenue
2014 - $165 million
2015 - $120 million
2016 - $33 million

A quick check - Penguin experienced revenue reduction of 80% from 2014 peak to 2016 trough. How can there be stability in the business. This company is highly cyclical. And I have yet to check the frequency of the shipbuilding cycle. But from what I heard, shipbuilding is typically 7 years of downturn and 1-2 years of upswing.

Then again, money can be made from cyclical companies, whether it is through tangible assets or free cash flow valuation.

Don't just rely on Penguin's raw revenue numbers and jump to a conclusion on Penguin's actual business volume in a particular FY or quarterly accounting period, as the revenue number does not capture the disposal of boats held under its charter fleet which is actually a normal business activity for Penguin.

The fact is that Penguin has managed, in the last few FYs, to dispose of most of its older crew boats and ferries under its charter fleet, which has been substantially renewed with its own newer design crew boats commanding higher charter rates. We should also note that when Penguin sells a boat - whether a fully-depreciated old crew boat or passenger ferry, or a relatively new crew boat - from its charter fleet, in accordance with the existing accounting policies, the sale proceeds (which can be in cash against delivery or regular instalments under a deferred payment plan) will not be captured as a part of revenue but instead in the cash flow statement under proceeds from disposal of PPE, and any profit from the disposal will be captured in the P&L under other operating income. As Penguin's charter fleet has been expanded to meet demand from the oil majors customers, the existing accounting treatment for any eventual sale of the boats from its charter fleet tends to understate the actual cash proceeds or cash flow coming into Penguin's bank accounts and B/S.

At the end of the day, prospective investors should compare carefully the profit from the disposal to the overall market capitalisation of penguin to determine if it is significant and decide if the price is right. Also, it is important to consider how management will return the free cash flow to shareholders based on their actions in the past decade. Being profitable doesnt necessarily make a good investment, it is important to avoid value traps

[pencilin]

Penguin is not a typical aluminium boat manufacturer which builds based on technical specifications or drawings provided by customers or their appointed boat designers. Penguin has its own range of boat designs - which are upgraded regularly - being marketed under its own "Flex" brand, covering crew boats, fast ferries, security boats, and fire boats targetted a diversified group of customers/users. I am not aware of any Chinese or Korean aluminium boat builder which has a similar range of own boat designs and specialises in boats up to 50 meters in length.

dydx
Does Penguin has any patent in boat design? As we know China is reputable for copying outright, or reverse engineering.
Only if Penguin has legal protection, then only that could protect on the designs. Thanks

(strongly disagree Penguin as Value investment)

[dydx]

dydx
Does Penguin has any patent in boat design? As we know China is reputable for copying outright, or reverse engineering.
Only if Penguin has legal protection, then only that could protect on the designs. Thanks

(strongly disagree Penguin as Value investment)

Boat design under patent protection? Frankly, I am not sure. Perhaps just on the shape of the hull. We have to bear in mind most of the equipment on board a boat are from rated or reputable suppliers - e.g. engines from Caterpillar, etc. Perhaps you can give Penguin management a call to check.

The fact remains over the years Penguin has built over 100 crew boats of different sizes of their own designs, and the company is building more for sale to owners/operators and for chartering to oil majors and their contractors.

[dydx]

The following article on Penguin published by NextInsight today is highly insightful...
https://www.nextinsight.net/story-archiv...n-malaysia
I should add the writer Soo Jin Hou (an investor based in Melbourne) has done much more in-depth research on Penguin than the analyst reports published so far.

[Shiyi]

Penguin's investment in Marco Polo Marine is baffling.
Wondering if any impairment is necessary?

[dydx]

Penguin's investment in Marco Polo Marine is baffling.
Wondering if any impairment is necessary?

Penguin's $8.0m investment in MPM now involves its current adjusted (for the portion of Management Award Shares ceded to MPM management team as a incentive) 7.71% interest (comprising 271,428,572 MPM shares acquired at $0.028/share) first made in Jan18 during the latter's financial restructuring and $60.0m rescue by a group of new investors...
https://links.sgx.com/FileOpen/PIL-%20In...eID=486585
In accordance with the prevailing accounting standards governing quoted investments, the latest (as at 30Jun19) carrying value of this investment in Penguin's B/S has been adjusted downwards to $4.614m...
https://links.sgx.com/FileOpen/Penguin_1...eID=573193

As a long-term investment, I suppose it is reasonable to assume that Penguin's BOD and senior management had carefully evaluated and understood the underlying businesses and assets - as well as the business and operating risks going forward - before committing to invest into MPM. I suppose we can take comfort that Penguin management understands very well the businesses of shipbuilding/shiprepair and chartering/management of marine vessels, as well as the operating environment in Batam. As after the financial restructuring MPM is now a debt-free business, I suppose what is required for the company to achieve a profit turnaround would be more business volume, hard work, some luck, and continued financial prudence.

[GenS70]

The argument on Penguin is or is not a value investment is baffling to me too! Is stock in a certain industry is or is not a value investment regardless of the share price?

Anyway I think this forum maybe shd define what is the definition of value investment otherwise we hv unhealthy discussion.

Or maybe we shd not get hung up with whether one stock fit the criteria of value investment, but whether a stock is a buy with good risk reward at a certain price or current price, and discussion shd focus on discussing facts and be discerning on opinions, after all we are all entitled to our opinion and this forum purpose is to share.

Some facts I hope some of your will find it useful- if not pls disregard it instead of looking at it as promoting own agenda, my purpose is to share, not intending to induce any investment decision

1. Penguin is shipyard that has a lot of resilience compare to most shipyard, look at the recent down cycle when most if not nearly all shipyards was having big trouble, penguin only lost a total of $6m despite being stucked with more than 10 stock boats, reference it with any other shipyard, make an attempt to rationalize how so

2. And it not just did not only lost very limited amount of $, it started to make very good money now especially when u compare it with other shipyard, again we shd attemp to answer how did they do it

3. Some further facts which may or may not explain above - it builds aluminum vessels unlike others you read about (they are all building steel vessels)

4. There are also not that many aluminum vessels being built each year as there are not that many shipyards that build aluminum vessels, which is the chicken or which is the egg I don’t know

5. Penguin has a significant % of market share for the category of vessel they build, read those recent analyst reports for verification

As to whether Penguin is still a buy now, I think a more robust qualitative and quantitative discussion will be helpful to this forum, that is where we can figure out the risk reward, happy to participate if there is such a robust discussion

[dydx]

The argument on Penguin is or is not a value investment is baffling to me too! Is stock in a certain industry is or is not a value investment regardless of the share price?

I suppose whether Penguin at the last done share price of $0.545 - giving a current market cap of $119.99m (based on its outstanding 220.17m issued shares) - is still a value investment opportunity for the average serious longer term investor, would depend on his own assessed fair intrinsic value of Penguin as a business and as a stock, backed by the underlying business and assets, including its projected future earnings and assessed growth potential. 

If the investor's own assessed fair intrinsic value of Penguin as a business is at least $200.0m, or $0.91/share - bearing in mind the latest (30Jun19) NAV is already $156.8m, this FY19-1H's NP was $8.365m and therefore full-year NP may well come in at $20.0m, and the business is poised to grow further - it would appear reasonable to assume/believe that Penguin at $0.545 remains an attractive value investment, as a 67% upside towards $0.91 plus all the dividends to come appear very attractive. As a comparison, if the investor's own assessed fair intrinsic value of Penguin as a business is only $150.0m, or $0.68/share, it would appear as a less attractive value investment, even though a smaller 25% upside towards $0.68 plus all the dividends to come appear fairly attractive still. As always, as investors we should do our own evaluation and calculations.

[Squirrel]

The discussion thus far has been interesting. There has been debates on various issues such as the requirement of a moat for a company in order to be considered an investment.

I have some comments on various points.

Penguin's investment in Marco Polo Marine is baffling.
Wondering if any impairment is necessary?

Accounting treatment for their investment I believe is mark to market on the listed prices. In short, any impairment or MTM gains will be reflected quarter to quarter and won't hit at one go in terms of impairment. Its included under changes in fair value of equity investment in the reports.

The argument on Penguin is or is not a value investment is baffling to me too! Is stock in a certain industry is or is not a value investment regardless of the share price?

Anyway I think this forum maybe shd define what is the definition of value investment otherwise we hv unhealthy discussion.

Or maybe we shd not get hung up with whether one stock fit the criteria of value investment, but whether a stock is a buy with good risk reward at a certain price or current price, and discussion shd focus on discussing facts and be discerning on opinions, after all we are all entitled to our opinion and this forum purpose is to share.

I felt great when someone comments "Shipbuilding is definitely not a business for value investing.". That's simply lovely. Only when there are generalisations like this would there be inefficiencies in the market and allow for gems to be found in industries that are facing issues and downturns at the moment. The sweeping opinion overlooks the research into specific companies and their performances. Simply awesome. But to GenS70's point, my opinion is that value stocks are not restricted by being within or not within an industry/sector. If a shipbuilder is now holding $1 cash unencumbered and trading at $0.50, would that be a value investment? Of course it would!

I suppose whether Penguin at the last done share price of $0.545 - giving a current market cap of $119.99m (based on its outstanding 220.17m issued shares) - is still a value investment opportunity for the average serious longer term investor, would depend on his own assessed fair intrinsic value of Penguin as a business and as a stock, backed by the underlying business and assets, including its projected future earnings and assessed growth potential. 

If the investor's own assessed fair intrinsic value of Penguin as a business is at least $200.0m, or $0.91/share - bearing in mind the latest (30Jun19) NAV is already $156.8m, this FY19-1H's NP was $8.365m and therefore full-year NP may well come in at $20.0m, and the business is poised to grow further - it would appear reasonable to assume/believe that Penguin at $0.545 remains an attractive value investment, as a 67% upside towards $0.91 plus all the dividends to come appear very attractive. As a comparison, if the investor's own assessed fair intrinsic value of Penguin as a business is only $150.0m, or $0.68/share, it would appear as a less attractive value investment, even though a smaller 25% upside towards $0.68 plus all the dividends to come appear fairly attractive still. As always, as investors we should do our own evaluation and calculations.

Currently as I speak, the market value of Penguin is $122.2m. Latest NAV reported is at $156.8m (0.78 PB). NCAV is $63.3m. Cash and equivalents and short term deposits add up to $48.5m. How I would view the company is that the company is currently being valued for its business at a value of $78.1m (122.2m - 48.5m + 4.4m). I couldn't get any seasonal trends of income due to the lumpy nature of its revenues. But assuming for this purpose that the full year comprehensive income is twice of the reported 1H numbers, and hence $14.7m, the current PE ratio (ex cash) sits at 5.3 times.

The nearest comparison to this company I could find listed is Austal that is listed on ASX. This is labelled as a global defence prime contractor and trades at 23.86x PE. Austal basically builds vessels for the US Navy as well as patrol and auxiliary vessels to defence forces around the world. What's interesting is that all of its vessels are made of aluminium, not steel. While I recognise that the overlapping business portion is in the patrol ships (which they supply to the Australian Department of Defence) and ferries, the larger part of its business lies in the larger vessels with the US Navy. This probably helps in assigning a premium to the valuation of the company.
What's interesting is the extent of the potential of aluminum ships that can be built. Penguin has been building boats for our very own SCDF and armored security boats for Nigerian owners. They definitely seem like they are expanding into the defence aspect of shipbuilding. How much can they scale up with respect to their boat sizes? Definitely doesn't seem possible at this point of time, but they do have the technical know how of handling aluminum hulls. Aluminum does seem to be replacing steel hulls in naval applications given the current advancements in technology, and that bodes well for Penguin.

Pros
- Aluminum is one third the density of steel
- With a lighter body, it allows for much better fuel economy
- lighter bodies also means faster speeds, which is crucial in defence related applications
- Aluminum require less maintenance cost as it does not need protective paint except below the water line where the fixtures and and fittings are touching the hull surface, this is due to higher corrosion resistance
- Aluminum boats have a much higher resale value due to its recycle value

Cons
- upfront cost of aluminum is much higher than steel
- structural and temperature related resistance compared to steel which is compensated with technology


Not going all the way to 23x PE, but just giving it a modest PE of 10x, the resulting market value I would deem fair would be at $147m + $48.5m - $4.4m. That's about $0.86 per share. That's probably a rough guide I am looking at. I do think for the past ten years, the shipping industry has been in a downcycle and that has unfairly penalized Penguin International. The focus of its business is not the headline tankers, container ships and bulk cargo vessels that the big shipyards construct and thus suffered over the years. This, in my humble opinion, has given the shipping industry a bad impression as an investment candidate. That makes it great for Penguin.

From when I started looking and buying into this, it still looks like a value buy without even taking into account the upside of further expansion of production capacity. That's where I stand at the moment and I sleep soundly holding this in my portfolio.