Penguin International

[CityFarmer]

Penguin stock seems to be down as per oil price. Looks like market is giving a strong signal to trade this stock as per oil price trend?

sent from my Galaxy Tab S

I will say, Mr. Market is giving a strong "opportunity" to own as per oil price trend.

Anyway, I ignore the "noises" of oil trend, and taking the forecast of IMF/WB i.e. $50-55 pb, as the reference for the company analysis.

(vested)

[CY09]

Hi Cityfarmer,

Can share your though process on how to project Penguin's revenue at $55 pb? This is because i dont remember a time when penguin's shipbuilding business encountered such a situation.

Thanks in advance!

[CityFarmer]

Hi Cityfarmer,

Can share your though process on how to project Penguin's revenue at $55 pb? This is because i dont remember a time when penguin's shipbuilding business encountered such a situation.

Thanks in advance!

I didn't use oil price to project revenue, but as reference for risk assessment. At the average price level of $50-55 in 2015, very unlikely Penguin revenue will be adversely affected by the oil price.

How about in 2016? Let's see any update again from IMF/WB next year...

[CityFarmer]

I might have been outdated, so appreciate someone can correct me where necessary.

I thought if the hedging instruments are applied exclusively to effectively hedge against certain items (in the case of Penguin, presumably the sales contracts), the impact of the hedging should be categorised into that specific items in the accounts (if it is meant for the sales contracts, then the specific item refers to the revenue).

If there is still high amount of forex gains/losses, it could be simply due to (i) the revaluation of certain non-reporting currency denominated items, or (ii) ineffectiveness in applying the hedging instrument, or (iii) management's speculation on FX.

I don't read the Penguin's latest results (as I rely much on the valuebuddies) so pardon me if my statement or assumption are incorrect.

[ tiny tiny lots vested ]

Understanding hedging accounting is a big topic for an non-accountant like me. May be an accountant can enlighten us more on the general principle.

I will focus only on Penguin's hedging accounting. Formal hedging policy of the company is well-explained in AR. The forward currency contract are normally used to reduce the currency exposures on material transactions, after sales commitment. In other words, for cash flow hedging.

For cash flow hedging, changes in fair value are taken directly to PnL for the year, which is normal to me. The net PnL are accounted in balance sheet, as asset or liability. Previous annual reports have shown the effectiveness of the hedging.

There is a liability of 2.4 mil on end-year report of 2014. I am confidence it will be net-off pretty soon in FY2015.

(vested, and sharing what I know, and understand)

[kelvesy]

From what I know, the net profit margin suffered deteroriated a bit and there is negative free cash flow due to huge capex lately. Coupled with a huge increase in inventories, I think the order book grew quite a bit for the management to embark on capex. Perhaps 4Q is just one-off weak performance, let's continue to monitor....

[bear]

I have reviewed FY2013 AR again.Regarding the section on 37.Risk Management objectives and policies.The sensitivity analysis for foreign currency risk assumed not only based on the strengthening/weakening of USD/SGD,but also EUR/SGD as some of Penguin's sales transactions are denominated in EUR.Besides a (decrease) in profits for a strengthening in USD against SGD,a weakened EUR against SGD will result in a further (decrease) in profits as well.Having witnessed a continued weakening of the EUR dollar across the past 1 year period,it is not surprisingly that the forex loss are significant as both EUR/SGD and USD/SGD trend go against the group profit.Interestingly the group's net profit/loss sensitivity to EUR/SGD is higher as compared to USD/SGD.

Scenario
USD/SGD – strengthened 3% (2012: 3%) (95)
USD/SGD – weakened 3% (2012: 3%) 95
EUR/SGD – strengthened 3% (2012: 3%) 154
EUR/SGD – weakened 3% (2012: 3%) (154)

[dydx]

I really wonder whether shareholders should be too worried about Penguin's reported forex losses mainly related to "Net fair value loss on derivatives".

In the FY13 AR, Note 37 sub-section (c ) on "foreign currency risk" (p104/105)…..
http://infopub.sgx.com/FileOpen/SGX-Peng...leID=20820
, Penguin has quite clearly described the normal forex exposures linked to its business, and the hedging strategies/methods being applied to hedge/mitigate such risks. For ease of understanding, the first portion of Sub-section (c ) is re-produced in full below…..

"The Group has transactional currency exposures arising from sales or purchases that are denominated in a currency other than the respective functional currencies of Group entities. The foreign currencies in which these transactions are denominated are mainly United States Dollar (USD) and Euro (EUR). Approximately 87% (2012: 73%) of the Group’s sales are denominated in foreign currency whilst almost 51% (2012: 50%) of costs are denominated in the respective functional currencies of the Group entities.

The Group and the Company also hold cash and cash equivalents denominated in foreign currencies for working capital purposes. At the end of the reporting period, such foreign currency balances amounted to $17,880,000 (2012: $15,220,000) and $658,000 (2012: $2,541,000) for the Group and the Company respectively.

The Group is also exposed to currency translation risk arising from its net investments in foreign operations, including Malaysia and Indonesia. The Group’s net investments in Malaysia and Indonesia that are not hedged as currency positions in Ringgit and Rupiah are considered to be long-term in nature.

The foreign currency risk is primarily managed by natural hedges of matching assets and liabilities denominated in foreign currencies. In addition, the Group uses forward currency contracts to reduce the currency exposures on material transactions, as deemed by management for which payment is anticipated more than one month after the Group has entered into a firm commitment for the sale. The Group has also been closely monitoring the foreign currency risk and has considered various hedging options for significant foreign currency exposure as and when the need arises."

In a nutshell, Penguin's long-term currency translation risk exposures in Malaysian MYR and Indonesian IDR related to its net investments in foreign operation in subsidiaries in Malaysia and Indonesia, are not hedged as they are considered to be long-term in nature. Accounting wise, such exchange differences are recognised initially in other comprehensive income and accumulated under foreign currency translation reserve (see Note 31 (b) in p94 of FY13 AR) in equity. The foreign currency translation reserve is reclassified from equity to profit or loss of the Group on disposal of the foreign operation.

Penguin's basic hedging strategy for transactional risk exposures in USD and EUR (linked to its on-going boat building contracts and sales) by applying natural hedges of matching assets and liabilities denominated in the respective currencies is a sound one. In addition, the use of forward currency contracts to reduce net exposures in USD and EUR on material transactions (e.g. big boat orders) - to lock in profit margin on such transactions - is also a sound one. Accounting wise, such forward currency contracts will lead to "net fair value gain/loss on derivatives" being recorded in Penguin's quarterly P&L reporting. When either currency appreciates substantially against SGD - e.g. USD's appreciation vs. SGD since Aug14 - Penguin will have to suffer a revaluation loss on such forward currency contracts, even though such contracts will serve to protect the profit and margin of the underlying boat building contracts to be realised upon delivery of the boats. Penguin's management may even be asked to explain their decision to hedge when the USD has been fast appreciating vs. SGD (and nearly all other major currencies) and, as a result, the company has forgone the opportunity to make some extra profits by staying unhedged.

[mslee888]

Penguin today touched 19.5ct. Anybody here has started to nibble at this stock again? The low crude oil prices seem to have hit the company's prospect in the new FY.

[BlueKelah]

Penguin today touched 19.5ct. Anybody here has started to nibble at this stock again? The low crude oil prices seem to have hit the company's prospect in the new FY.

Just recently some were nibbling in at 21.5c

still too pricey @ 19.5c IMHO.

[CityFarmer]

Penguin today touched 19.5ct. Anybody here has started to nibble at this stock again? The low crude oil prices seem to have hit the company's prospect in the new FY.

I have accumulated more today, at $0.20