Penguin International

[Reenat]

Noted that Penguin's 1H 2023 result is disappointing even with the increase in revenue. The increased revenue is from contracts/charters that occurred this current year. Some of the costs incurred, such as insurance, vessel preparation, mobilization cost, etc. could have been booked at the time of the mobilization, thus booked during the 1st half. The revenue from the charters from subsequent months in the second half would result in higher profit.

Thus, my take is that this is just a cost entry issue when it is booked and not that the company is doing badly. Over a financial year, the cost might even out...

Any accountant in the forum care to comment further...

[dydx]

Those who have followed Penguin over the years should know the underlying business is strong and well placed, despite competition and other external factors, like oil price and Covid. There is proven cash generation from sales of stock vessels and the charter fleet, as well as BTO new shipbuilding. That's why the Offeror and the 3-party consortium behind it want to buy out the minority shareholders.

[header]

Dydx, I am with you on this. . Just to be clear, I am not saying management commits fraud. But there are certain leeway, especially for unaudited numbers.

[dydx]

Hi header, I don't think we are talking about fraud here. We all know accounting, even with all its rules, is like an art as well, with some items open to different interpretations, e.g. whether to accrue an expense or charge it in one go. Also, some items are based on paper documents which can be dated earlier or later, usually both can be acceptable. Even a potential fraud has to be first investigated by an auditor tasked by the Audit Committee or SGX Regco, guided by defined terms of reference, before a conclusion can be established. As investors, we much prefer professionals and managers running listed companies to be not just legally right, but also morally right and honest too, and doing the right things for the interests of all shareholders.

I suppose the crux of the matter here is whether the sharply lower 1H profit numbers, including those in the segmental reporting especially related to Vessel Chartering Div., are prima facie believable based on the usual test of reasonableness by those who understand accounting and Penguin's business. This is especially relevant in the current critical circumstances faced by the remaining minority shareholders, who are disturbed by the GO and in a way pushed to have to respond to actions by the Offeror, which is a consortium comprising 2 in Penguin's top management and a PE fund (with a seat in the BOD) - all driven by their own self and combined interests to gain extra from the investment value of the underlying business and assets within Penguin. Clearly, the remaining minority shareholders are in a disadvantaged situation when compared with the Offeror, including in accessing current information of the underlying business in order to evaluate its justified fair value.

In the end, minority shareholders have to look after their own interests in their investments.

[header]

Agree with you dydx. The comment on fraud was in view of someone's else comments.

I am puzzled why SGX never query Penguin on their latest results. This is especially when the offer is ongoing and the company should be obligated to disclose more for shareholders to make informed decision? I do hope SGX should be more proactive, especially in this case.

Will you be writing to SGX on this?

[donmihaihai]

1H results..
https://links.sgx.com/FileOpen/Penguin%2...eID=768290
Do note the financial statements the explanatory notes have not been audited or reviewed by the Company’s auditors, so it is as good as the management compiled the numbers and results announcement, and the BOD added its consent and then Penguin released it on SGX. With the latest position of the Offeror - a consortium comprising the Executive Chairman, MD and Dymon Asia Private Equity - at a critical 88.77%, common sense tells me that it will be naive to expect Penguin to post good profit numbers in the 1H results - which obviously will work against the Offeror's interest and objective to privatise Penguin for the cheap.

But frankly, I totally didn't expect the sharp 64.6% fall in group NP to only $2.4m, especially when group revenue advanced a strong 44.9% to $89.0m - with Shipbuilding/Ship Repair/Maintenance Div. +50.2% to $72.5m, and Vessel Chartering Div. +25.3% to $16.5m. Even my smart but inexperienced son - a SMU Scholar majored in Accounting - felt the extent of the profit decline unbelievable, especially since market demand and charter rates for offshore O&G equipment (rigs, vessels, etc.) have been on the rise post-Covid since 2022.

What I find totally unbelievable is that in segmental reporting (p12), Vessel Chartering Div. showed a pretax loss of ($1.48m) when revenue increased +25.3% to $16.3m, even though operating cash generation remained comfortably positive. In the explanatory notes (p23), it described that "higher marine insurance costs arising from more vessels being added to the Group’s operating fleet' contributed to the much higher operating expenses, which increased +104.1% to $7.8m. I find it hard to believe that marine insurance premiums related to more vessels added to the charter fleet could be more than the increase in charter income (revenue), resulting in turning the entire Chartering Div. from a pretax profit of +$1.43m in 1H-FY22, to a pretax loss of ($1.48m) in 1H-FY23. I really hope SGX Regco or SIAS could pick up the above abnormalities and query Penguin. If and when that happens, Penguin's Finance & Administration Director Tung May Fong would have to give proper factual explanations.

As usual, Penguin chose not to provide order backlog information on shipbuilding - which is generally available from most listed shipbuilders. From the very sharp increase and large balance under "Advance payments and deposits received (non-refundable)" of $34.32m (see p21,under Note. 15 Other payables and accruals; vs. only $4.82m as at 31Dec22), we actually have a concrete tell-tale sign that Penguin has secured a lot more new shipbuilding orders. Assuming 15% as a norm for advance payment/deposit for typically new shipbuilding contracts, we could be looking at over $200.0m in the order backlog for shipbuilding contracts backed by advance payments/deposits.

We know the Offeror wants our shares badly. In an indirect way, the just released 1H results again confirms that. I am keeping my prized Penguin shares for the next GO which should be at a much higher price more in line with the growing intrinsic value of this promising and well-placed business.

If I push it a little, the stupid me would have taken that the management committed fraud from your comment. 

Regardless of what the management position is, I still consider the financial result of Penguin fairly present at the minimum. Of course, that is me. 

1H FY2022 results wasn't that good. Margin is depressed since about 2 years ago and despite the higher NPAT in 1HFY2022, marketing, admin and other expense pretty much cleaned off GP. NPAT basically contributed by other income. Penguin performed better in 1H FY2023 in this aspect because of the increased in turnover. This is only part of the story, to understand Penguin number, one need to understand how Penguin operates because Penguin build to stock/operate and make opportunistic disposal, a good part of the profit will not come through turnover and COGS and it is also understandable that the management is able to control the timing of disposal but I would say that for this part, it is built in because any investor who invested in Penguin should know about this. 

My comment will piss people off, but words can kill, and I don't see that the management deserve to be painted to such a degree by words.

It is perfectly alright to be sceptical, but to suggest, paint and use selective data is another. So let me finish this since I started it.

1st.
1H 1H
2023 2022 2022 2021 2020 2019 Year
88967 61409 135227 123649 119417 136337 turnover
22332 15662 35916 37179 33919 40570 COGS
25% 26% 27% 30% 28% 30% GP Margin

-19755 -15212 -31486 -29313 -28323 -27830 Op expenses
-22% -25% -23% -24% -24% -20% % of turnover

3% 1% 3% 6% 5% 9% GP margin less Op expenses

2419 6842 10554 12668 13207 19414 NPAT
3% 11% 8% 10% 11% 14% NPAT Margin

From the above, It is very clear that a) GP margin is declining, b) operating expenses increasing, c) operating expenses clean off a huge portion of the gross profit and d) a big portion of the NPAT contributed by other income. For 1HFY2022, almost all of the NPAT contributed by other income while margin at 11%. 1H FY2023 is another story, the only period in the above period where other income contributed the least.

To say that cost recognised in this period not that period don't even fly here. Just think about it in percentage. the different between 1HFY2022 & 1HFY2023 GP margin is only 1% and other income contribute like >10% NPAT margin. Where is the elephant? The place to look for is other income and as I wrote earlier, this is the place where management has control and should have control on when to sell operating vessels.

2nd.
Segmental
chartering.
Lost in 1H 2023 of -1.5M as compared to profit of 1.4M in 1H FY2022. Let put in more information,
Shipbuilding
Profit of 4.6M in 1H2023 as compared to profit of 2.8M in 1H2022.
adjustment and elimination
Profit of 1.5M 1H 2023. as compared to profit of 4M in 1H2022

Just these number alone, think about it. why show losses in chartering then higher profit in shipbuiding(which never been mentioned here). Then there is a huge 4M in 1H2022 adjustment and elimination. For anyone looking for answer, I urge you to read the segmental, follow the notes, compare to P&L and other income. the answer jump straight out.

Just as increased in insurance is put in as one of the reasons for increase in expenses by the management, the bigger item is actually forex, gain of 1.2M in 1H2022 as compared to loss of 1.4M in 1H2023. a swing of 2.6M which reduce profit. (not mentioned of course)

I don't know whether this 2.6M hit shipbuilding or chartering in segmental results. Likely to be both segments because not a lot of SGD involved in chartering and shipbuilding. So just ignore it, then what, there was gain of $2.8M on disposal of PPE which was mainly vessels in operating. This gain pretty much explains the profit in 1H2022 chartering segment. Without the disposal, chartering was loss making in 1H2022. How do i know that, because PBT in segmental matches P&L figure and one can figure out the whole thing easily.

I can split out the number because as I wrote earlier, number presented fairly, at minimum. I can't do it without the "communication" given in the financial statements.

[dydx]

Hi donmihaihai, may I ask do you still hold Penguin shares? Do you know Penguin's Chairman or MD personally?

[donmihaihai]

Hi donmihaihai, may I ask do you still hold Penguin shares? Do you know Penguin's Chairman or MD personally?

No. 

I wrote because of post #1614 under this thread. Point out if I got my fact wrong and I will change it.

[dydx]

Hi donmihaihai, since you don't hold Penguin shares now, and you may not have communicated with Penguin's Chairman or MD before, I don't think you would be able to appreciate very well how some remaining minority shareholders feel about the current situation of their investment.

Everyone is entitled to his own views and opinions, and if I may add, technically all personal opinions - including those backed by or arising from interpreting so-called 'facts' - are inherently biased to at least a certain extent, and at times to a large extent. What you have written is based on your own views and your crunching the historical financial numbers, and I find no reason to correct them. I just feel that your views would not be of much help to the remaining minority shareholders who have to make their own decisions, especially to protect their interests in their investment.

After reviewing Penguin's 1H results announcement, I wrote my post #1614 to document and share my reactions and interpretations. Against the sharp +44.9%YoY increase in group revenue to $89.0m, I just felt the even sharper -64.6%YoY decrease in NP to just $2.4m, to be prima facie unbelievable, bearing in mind it is widely reported that demand for O&G related equipment and vessels has been rising since mid-2022 and post-Covid - partly driven by a surge of offshore wind projects globally - and currently it is strong still, and current supply is tight. I also felt that in the segmental reporting, against a healthy and rather sharp +25.3%YoY increase in revenue to $16.5m, the Vessel Chartering Div. turning to a Pretax Loss of -$1.5m, from a Pretax Profit of +$1.4m, to be prima facie unbelievable as well. [Note: In the FY22 AR and audited financial statements, under segmental reporting (p120), PBT for the Vessel Chartering Div. for FY22 and FY21 were $9.6m and $10.1m, respectively.]  As a seasoned investor in stocks, the above are just my reactions after reviewing the results announcement. If I may add, over the years of my investment journey and learning, my mind has become more sensitive when reviewing annual reports and results announcements, always throwing out questions, and looking for answers. In fact, it will be great and opportune if Penguin's CFO can meet up with me and other interested minority shareholders, so that we can clear our doubts and seek some clarifications.

[weijian]

Hi donmihaihai, since you don't hold Penguin shares now, and you may not have communicated with Penguin's Chairman or MD before, I don't think you would be able to appreciate very well how some remaining minority shareholders feel about the current situation of their investment.

hi dydx,

There is this thing called an "outside view". I probably do not have as much experience as you do, but my sufficient experience tells me that "outside views" are often more important than "inside views".  So let's not dismiss another VB who has spent time to crunch some numbers and write down a post, just because he/she didn't have direct communication to the Mgt OR isn't vested.

Also, how shareholders feel is one thing, what are the facts is another. I like what John Chambers, ex CISCO CEO said in his memo - Respond to emotional situations by focusing on facts. Respond to facts by looking at the emotional impact.