Penguin International

[ValueBeliever]

Dare to buy on breakout? Is Jeffrey Hing finally selling out or is it due to Kim Heng Marine listing effect. Will it hit 17cts first resistance?

[Ben]

Penguin has also added/replaced the following new first paragraph in its home page…..
http://www.penguin.com.sg

"It Just Keeps Getting Better In 2014, Penguin Shipyard International will unveil the brand new Flex-40 series, successor to the best-selling Flex-38 series. the new Flex-40 line-up features expanded fuel tanks, larger deck space, a knuckle boom crane, new reclining seats and a host of engineering enhancements. Whether you are fighting pirates in the Gulf of Aden or rushing critical spares to a drilling rig, the new Flex-40 series is the fast and furious solution."

Thank dydx for highlighting the updated website. “It Just Keeps Getting Better”…I simply like this tag line. It speaks volume of the management confidence of the company future performance.

Another quote from the website:

“Rise of the Flex. In June 2013, Penguin Shipyard International completed its 50th Flex crewboat, a Flex-38SL, for a Russian ship owner. Christened "Kirrie", the vessel will join a global deployment of Flexes, from Asia to Africa. With a build cycle of less than six months - from keel lay to end of commissioning - we are the world's fastest builder of crewboats. And with more than 20 Flex crewboats under construction in 2013, we are also the world's most prolific crewboat builder. Come visit us at the Home of the Flex! “

In the 9 months ended 30 Sep 2013, Penguin sold 10 crewboats to third party and took delivery of five crewboats for its chartering business. That means 15 crewboats were built and sold as of Q3. Obviously, some of these crewboats must have been built/partially build in previous years. Since there are more than 20 crewboats under construction in 2013, less off 15 completed as of Q3, and make adjustment for those that were built in previous years, and also adjust for some that were incomplete as of end 2013, I believe Q4 numbers for crewboats sold and/or for in house chartering will be high and nice.

Building more than 20 crewboats a year means Penguin is reaching its capacity. So it will be interesting to see what the company expansion plan is. We can tell that over the years, it is building bigger boats, from Flex 36 to Flex 38, and now Flex 40 and Flex 50. Obviously, a bigger boat will sell for more money, or charter out at higher rate.

It Just Keeps Getting Better….

[dydx]

While Penguin is now building at the rate of 20 crewboats a year, I don't think that is the maximum capacity yet, because conceivably its expanded Batam yard (completed in late-2011) should have some more room to raise production including adding workers or shifts.

We should also bear in mind that Penguin's own fleet of crewboats for charter is being carried on its B/S at substantially its own cost of production less recurrent depreciation - i.e. there is ample room to book a good profit from the sale of any of such crewboats to charterers or 3rd-parties. To the extent that Penguin can regularly sell the crewboats in its charter fleet at a profit, this simply means that there is a hidden reserve or additional value in its charter fleet over its carrying value in its B/S.

Since Penguin has been building up its own fleet of crewboats for charter only in the last 3 years, we really have not seen the full potential of the charter income from the fleet yet - i.e. this clearly growing and sustainable revenue and profit stream is still under appreciated by shareholders and potential investors alike.

So I guess it is quite reasonable to believe that Penguin's business and earning strengths should keep getting better too!

[Ben]

Page 20 of its 2011 AR did mentioned that its shipyards in Singapore and Batam are capable of delivering more than 20 crewboats a year. This was a point raised and confirmed by the management in the last AGM. At the rate they are building now, even if they have not reached its limit, I believe it won’t be long that they have to face this problem, but no doubt a good problem to have. With more than $40M cash on hand and zero debt as of end Q3, expanding capacity is really not a big issue.

And yes, I agreed with your views on the hidden value of its charter fleet over its carrying value in its B/S, and the huge potential of its chartering business. Not to forget that the company still has 3 laid-up ferries which have been written down by $1.25M in Q2. Any development to these ferries, be it disposal or charter out, will have a positive impact to its bottom line.

[specuvestor]

Interesting discussions. Penguin seemed to be taking a page off the old Jaya.

1) May I know what is the guesstimate utilisation rate of the offshore chartering and ferry businesses in 2013?

2) When the shipbuilding buisness sells the boat to the chartering and ferry businesses, how do they book the PnL?

3) What is the catalyst for the sudden surge in demand for crew boats? What changed?

Thanks much

[Ben]

I do not know what the utilisation rate of its chartering business is. I guess it must be encouraging enough for them wanting to expand this segment aggressively in the last 3 years. Having a fleet of in house crewboats also has one advantage, its available for sales immediately should someone come knocking on their doors, and in today’s market, vessels available for sales immediately will command a premium. As for its ferry business, there are 10 left. 7 were contracted out to Midef and 3 are laid- up.

OSV market is in an upswing stage now, due to replacement cycle for aging vessels and under order of such vessels from 2009 onwards. This probably explains why chartering rates are raising. I understand that the servicing ratio between oil rig and OSV are at a disparity now. And with oil exploration going further out and deeper into the seas, the need for bigger, faster, more sophisticated and better fuel economy OSV is becoming even more acute. These are traits we can see in its Flex crewboats.

In term of valuation, Penguin is trading at a historical PE of about 7X, and 2014 PE will be even lower with improving performance. Previous mid to high cycle valuation for OSV players is in the range of 10X – 15X. There are still lots of upside potential IMHO.

[valuehunter]

I do not know what the utilisation rate of its chartering business is. I guess it must be encouraging enough for them wanting to expand this segment aggressively in the last 3 years. Having a fleet of in house crewboats also has one advantage, its available for sales immediately should someone come knocking on their doors, and in today’s market, vessels available for sales immediately will command a premium. As for its ferry business, there are 10 left. 7 were contracted out to Midef and 3 are laid- up.

OSV market is in an upswing stage now, due to replacement cycle for aging vessels and under order of such vessels from 2009 onwards. This probably explains why chartering rates are raising. I understand that the servicing ratio between oil rig and OSV are at a disparity now. And with oil exploration going further out and deeper into the seas, the need for bigger, faster, more sophisticated and better fuel economy OSV is becoming even more acute. These are traits we can see in its Flex crewboats.

In term of valuation, Penguin is trading at a historical PE of about 7X, and 2014 PE will be even lower with improving performance. Previous mid to high cycle valuation for OSV players is in the range of 10X – 15X. There are still lots of upside potential IMHO.

While i agree that the current valuation is not at all demanding IMO, Penguin is operating in a cyclical industry, right? So when the music stops and the industry goes through the next downcycle, what would then be the acceptable PE? 4X-5X? Would the recurrent income stream that Penguin has been building up in recent years be sustainable/resilent enough in the next downturn?

So does it mean what is cheap now will become just as cheap in the next downcycle? So investors in this type of business have to know when to exit before the music stops?

Seeking to understand more.. thanks

[dydx]

Penguin has revealed the detailed specs of its new Flex-40 series of fast crewboats - in 2 versions: Flex-40 and Flex-40SL - which will replace its successful Flex-38 series with enhanced features…..
http://www.penguin.com.sg/flex-40/

Penguin has also updated its Corporate Profile by revealing that the company has delivered its 60th Flex crew boat in 2013…..
http://www.penguin.com.sg/about-us/corporate-profile/
Based on the fact that Penguin had previously revealed that the company delivered its 50th Flex crewboat in Jun13, and had produced/delivered a total of 15 crewboats - including 5 for its own chartering fleet - in the first 3Q's ended 30Sep13, this is an advance indication that the company produced/delivered at least another 5 crewboats in Q4.

[Ben]

Delivering 5 crewboats in Q4 means its performance will be similar to Q2, which is a record quarter. The high advance payment received from customers as at end Q3 is already a tell-tale sign that more crewboats will be delivered in Q4. With an expanded fleet of boats available for charter plus the soaring chartering rates, will Q4 results turn out to be the best quarter for Penguin?

In an article in yesterday Straits Times Money section, “Surprise surge in year-end factory output”, transport engineering sector registered a growth of 13.8% in Dec 2013 over Dec 2012, and 5.2% in 2013 over 2012. The increase was due to more rigs and ships built. To quote CIMB economist Song Seng Wun: “rare, sharp revision to transport engineering growth in November, from 6.4 per cent to 16.3 per cent, due to an upgrade in offshore and marine activities.” This is another clear indication of the robustness of the offshore industry.

[kelvesy]

Looking forward to its quarterly report due early next month. Penguin has certain niches such as innovative capabilities in building ships.

Still undervalued, in my humble opinion.