Penguin International

[dydx]

The USD/SGD rate has since mid-March retracted by 4.8% from the high of 1.3918 recorded on 16Mar15, to 1.3245 as of yesterday's closing. Based on the historical chart, the current USD/SGD rate level of 1.324 is close to the closing rate of 1.3213 as at 31Dec14.....
http://finance.yahoo.com/echarts?s=USDSG...nteractive#{}

Assuming the current USD/SGD rate level of 1.324 holds till say 30Jun15, it is conceivable that Penguin would have to write back in Q2 - as a forex revaluation gain - most of the $1.249m in forex revaluation loss taken in Q1 .....
http://infopub.sgx.com/FileOpen/Penguin_...eID=349475
If SGD continues to strengthen against the USD, the resultant revaluation gain in Q2 could be even bigger.

Does the above change the underlying business and profitability of Penguin's boat building business? It doesn't appear so. But it does appear that accounting policy does have a way to trick the investors' mind.

[Bibi]

Not so because of having a screen and buttons. Because they know the likelihood of getting caught by company is low. Alternatively, one can trade during lunch hours which i believe wont infringe any employment clauses or queue your stock purchase during off office hours. My employer actually banned all financial sites e.g: all brokerage firms, SGX, yahoo finance etc..

Its a bit frustrating cos there was once Penguin released its result in the morning and i was heavily vested but unable to see its results.

A screen and buttons, not necessary means PC. It includes mobiles e.g. Tablets and Smart-phones. Tablets and phones with mobile links, are out of the scope of company firewall.

I don't mean neglecting your work and focus on stock. Taking few minutes of break, is reasonable, while not violating company rules.

One hints, SGX has a app to allow you to peek into company announcement via smartphone. It isn't friendly, but a quick peek into key numbers are possible.

(sharing an experience)

Yes i forgot to mention i worked in defence related industry and my employer disallow the use of internet on our smartphones during office hours. Of course i can always surf using my mobile but just dont get caught.

[valuebuddies]

Yes i forgot to mention i worked in defence related industry and my employer disallow the use of internet on our smartphones during office hours. Of course i can always surf using my mobile but just dont get caught.

Time to consider a move buddy

[jjlim84]

Not so because of having a screen and buttons. Because they know the likelihood of getting caught by company is low. Alternatively, one can trade during lunch hours which i believe wont infringe any employment clauses or queue your stock purchase during off office hours. My employer actually banned all financial sites e.g: all brokerage firms, SGX, yahoo finance etc..

Its a bit frustrating cos there was once Penguin released its result in the morning and i was heavily vested but unable to see its results.

A screen and buttons, not necessary means PC. It includes mobiles e.g. Tablets and Smart-phones. Tablets and phones with mobile links, are out of the scope of company firewall.

I don't mean neglecting your work and focus on stock. Taking few minutes of break, is reasonable, while not violating company rules.

One hints, SGX has a app to allow you to peek into company announcement via smartphone. It isn't friendly, but a quick peek into key numbers are possible.

(sharing an experience)

Yes i forgot to mention i worked in defence related industry and my employer disallow the use of internet on our smartphones during office hours. Of course i can always surf using my mobile but just dont get caught.

I thought non camera phones will do, they even prevent using mobile internet??

[Ben]

My opinion is now not a good time to accumulate penguin. Until we can see the next quarter result and estimate the whole year earnings to see if ROE has deteriorate and calculate the new intrinsic value.

I agreed. The situation is still hazy, and so we shouldn't be too hasty. I personally think Q2 will be worst off that Q1. I am referring to the underlining biz, excluding things like FX gain/loss or disposal gain/loss. I view Q1'15 sales of $35M, which is higher than Q1'14 and similar to Q4'14, in accordance to what mgmt has said before. ie, the demand for crew boat is still steady for now. That's also means, in my own interpretation, that we have not seen the worst yet. Luckily for me, I have disposed off 50% of my holding in the beginning of the year, and I shall wait for Q2 announcement before deciding my next move. LT wise, I still think this is a good company with a good mgmt team.

[valuebuddies]

I think most likely the derivatives we are talking about are mainly plain vanilla currency forward. For such a currency forward, the exchange rate for a notional amount is fixed now for settlement in future date (usually non-deliverable for forex). (i) exchange rate is upon negotiation between the company and the financial institution, (ii) notional amount should be the contractual value in foreign currency, (iii) settlement date should be the date approximates the realisation of the contractual sum (eg. the vessel delivery date).

A simple illustration as follows:
(i) USD:SGD 1.3
(ii) notional amount = sell USD10M
(iii) settlement date = 31.05.2015
(iv) spot rate on 31.03.2015 = USD:SGD 1.33
(v) derivative value = USD10M x [1.3 - 1.33] = -ve SGD300K
(vi) spot rate on 31.05.2015 = USD:SGD 1.33
(vii) derivative value remains as -ve SGD300k, which is amount payable to the financial institution
(viii) accounting entry = (DR) Derivative SGD300k (CR) Bank SGD300k

IMO, there have been wrong perceptions that whatever exchange loss recognised in derivative will be reversed upon maturity of such derivative. And also a wrong perception that derivative loss as part of operation loss. To me, I would rather a company uses derivative to hedge again currency risk than not doing so. The earlier shows prudent and conservative, the latter seems speculating.

A correct mindset is needed to recognise that derivative, so long they are applied exclusively for the purpose of hedging, is good for the company and shareholders. Gain or loss from derivative are all depending on the currency fluctuation which got nothing to do with the management capability.

[Clement]

I think there is a bit of confusion regarding the impact of the foreign exchange hedging losses on Penguin's 1Q15 results.

Penguin was short forward USD with notional amount of ~$59 million with maturities up to Oct 15 at the start of the period. Some of the contracts were probably settled during the period (only $163,000 in fair value losses in 1Q15). Given that the company enters into these contracts upon receiving a firm commitment from a customer (revenue not yet recognized), the result of the recent USD appreciation is stronger SGD revenue on USD denominated sales and a fair value loss on the forward positions.

The weakening euro seems to be another possible cause, given the much larger move in the Euro during the first quarter, the company's larger exposure to Euro (per the annual report) and that the company does not seem to hedge its Euro exposure.

[heifien91]

My opinion is now not a good time to accumulate penguin. Until we can see the next quarter result and estimate the whole year earnings to see if ROE has deteriorate and calculate the new intrinsic value.

I think it is a little unfair that one actually bases the intrinsic value of the company on each quarterly results. While I do understand that intrinsic value of the company does fluctuate over time, however, it is only over a long period of time. From quarter to quarter the intrinsic value of the company does not fluctuate that drastically.

[Yoyo]

I think there is a bit of confusion regarding the impact of the foreign exchange hedging losses on Penguin's 1Q15 results.

Penguin was short forward USD with notional amount of ~$59 million with maturities up to Oct 15 at the start of the period. Some of the contracts were probably settled during the period (only $163,000 in fair value losses in 1Q15). Given that the company enters into these contracts upon receiving a firm commitment from a customer (revenue not yet recognized), the result of the recent USD appreciation is stronger SGD revenue on USD denominated sales and a fair value loss on the forward positions.

The weakening euro seems to be another possible cause, given the much larger move in the Euro during the first quarter, the company's larger exposure to Euro (per the annual report) and that the company does not seem to hedge its Euro exposure.

Hi Clement

I concur with your understanding on the derivative accounting, the impact of the stronger SGD revenue and the fair value difference on the forward positions would zeroised each other, thus management position that there is no real gain/loss. Effectively management is locking in the SGD equivalent of its vessel sales at the point of receipt of sales order. From another perspective, management has incorporated the profit (in SGD) into its USD sales quotation.

In the Annual Report, the note to account only mentioned on the treatment of USD sales contract, nothing mentioned on the Euro sales contract, presumably of substantial smaller impact.

On the purchase payable, Euro payable is of substantial amount, and the CFO has advised me that management does take up hedging on Euro exposure during the April 2015 AGM.

Types of exchange difference that hit the Income Statement
1. Transaction - Realised
2. Balance Sheet position with foreign currency - Unrealised
3. Derivative - Fair value

Seems to me that management is indeed prudent and conservative in its foreign exposure management. They know what they are doing, and their treatment is aligned to that of Keppel, as confirmed by the independent director.

It is unfortunate that management get hit for doing the right thing. IMO.

[CityFarmer]

I think there is a bit of confusion regarding the impact of the foreign exchange hedging losses on Penguin's 1Q15 results.

Penguin was short forward USD with notional amount of ~$59 million with maturities up to Oct 15 at the start of the period. Some of the contracts were probably settled during the period (only $163,000 in fair value losses in 1Q15). Given that the company enters into these contracts upon receiving a firm commitment from a customer (revenue not yet recognized), the result of the recent USD appreciation is stronger SGD revenue on USD denominated sales and a fair value loss on the forward positions.

The weakening euro seems to be another possible cause, given the much larger move in the Euro during the first quarter, the company's larger exposure to Euro (per the annual report) and that the company does not seem to hedge its Euro exposure.

Clement's post has given a brief summary of the hedging operation. Base on build-cycle of about 6 months, the "stronger SGD revenue" will be accounted likely in Q2.