Penguin International

[CityFarmer]

This is funny again. When one invest, the factors are your position size (that u r putting into the particular company wrt to your entire portfolio) and the outstanding free float (market cap of shares not owned by major shareholder/s), and NOT the share price. Unless it is at its extremes (eg. small prices that are close to the bid ask spread or high prices where the min lot is a tall order for the average guy), liquidity is never a function of the share price and any irrational behavior deviation from that should be viewed as an opportunity, rather than a threat.

The consolidation is a corporate action, decided by the management. I am viewing it from the perspective of the management. It is the responsibility of the listed company management, to maintain reasonable liquidity, and low volatility, for the interest of shareholders, as well as capital raising(s), if any.

The company management may hope that its shareholders are mostly value investors, but I afraid value investors are always the minority.

(vested)

P.S. liquidity is never a function of the share price? I reckon, you might mean liquidity is never a function of the IV, right?

[weijian]

I do not think there is a problem with this corporate action because it is a response to changes in listing rules. Rather i think that the value of the consolidation ratio is an interesting matter to discuss. It is kinda fun to see the different reactions and rationale to this ratio number.

I dont follow Penguin that closely but i do believe the controlling shareholder is also executive in nature. While i do not think he is a tycoon in his own right, my learning of these "above average" entrepreneurs/tycoons thus far, is that they dont really regard those factors u just mentioned as top priority.

[CY09]

http://infopub.sgx.com/FileOpen/Penguin_...eID=391136

Pretty lacklustre results, dividends has been cut.

Sticking point with results is the consistently high inventories. Hope that it can unwind the approx 50 mil of inventories and let it flow into cash quickly

It is worth noting that Penguin now has to pay 840k of term loan in each quarter (3.36 mil per year).

Current fleet in pelican consists of 13 crewboats & FSIV, with 2 more likely to be added this year

1 question: What's the use of adding a 30 mil dividend income in the ferry & charter services and then eliminating the 30 mil from"others" segment?
It is making the ferry charter segment look very profitable when in fact it is likely profits have fallen from 8 mil to 3 mil

[yawnyawn]

Revenue for FY2015 was $119.9 million, a decrease of 27.3% over that of the previous corresponding period.

It is not too bad if we use Nam Cheong as a comparison. Their revenue for FY2015 was RM950.0 million, 51% lower as compared to RM1.93 billion in FY2014.

2016 will be a cost-cutting year for oil and gas support services companies.

(Vested)

[Lich]

The offshore oil and gas industry is a cyclical one. The financial performance of Penguin can be erratic.

Can we say that there can be consistency in its financial performance?

Would there be better businesses that are more predictable and consistent than Penguin for a value investor?

Just my opinion.

[yawnyawn]

The offshore oil and gas industry is a cyclical one. The financial performance of Penguin can be erratic.

Can we say that there can be consistency in its financial performance?

Would there be better businesses that are more predictable and consistent than Penguin for a value investor?

Just my opinion.

Of course there are businesses, namely utilities and consumer staples companies, that are more predictable and consistent than Penguin.

However, are they trading at the same valuations as Penguin?

Penguin still has a net cash position of 24M as at 31 Dec 2015 and is one of the few oil and gas companies on SGX that has a net cash position. With the conservative management, i hope they can ride out this oil crisis and come out stronger!

(vested)

[valuebuddies]

Annual Report freshly out:

http://infopub.sgx.com/Apps?A=COW_CorpAn...0c77cf8482

[Clement]

Just looked through the annual report, let me share some thoughts on Penguin.

The Bad

Increasing customer concentration risks. Revenue from 3 largest customers increased by 7% in 2015 and more importantly, now represent 62% of total revenue, compared to 42% in 2014.  The management’s strategy to broaden their customer and product base is therefore currently not bearing fruit.

Customer cancellations has led to a large build up in finished goods inventories. Income from deposit forfeitures of $2.5 million from none the year before has resulted in $32 million in unsold finished goods on the balance sheet.
 
Poor returns on investment in motor launches for charter. Management has opted to increase the size of the group’s charter fleet despite marginally profitable chartering day rates and likely poor fleet utilization rates.
 
The Good
 
Cash flow from operations is healthy. Management has done a good job in managing working capital despite the inventory buildup, aided by the one off gain from the legal settlement.

Advances from customers increased in 4Q15. Advances received from customers increased in 4Q15 to $2.3 million from $0 at the end of the third quarter. This does imply that orders have resumed in the fourth quarter. However, this is offset by the lack of hedging contracts the group normally enters upon receiving a firm commitment.

The bizarre        

Yard expansion onto Pulau Seloko. This is surprising given the management’s initiatives to pare down shipbuilding activities and reduce the workforce in Singapore and Batam. Furthermore, there are dozens of shipyards on Batam, which are affected by the oversupply in the tug and barge market and can be acquired relatively cheaply. The choice to expand shipbuilding facilities onto an undeveloped island, creating difficult logistics ferrying staff and materials/supplies back and forth in the future, is strange in my view given the other options and that there is no rush to expand at the moment.

[CityFarmer]

Increasing customer concentration risks. Revenue from 3 largest customers increased by 7% in 2015 and more importantly, now represent 62% of total revenue, compared to 42% in 2014.  The management’s strategy to broaden their customer and product base is therefore currently not bearing fruit.

Customer cancellations has led to a large build up in finished goods inventories. Income from deposit forfeitures of $2.5 million from none the year before has resulted in $32 million in unsold finished goods on the balance sheet.
 
Poor returns on investment in motor launches for charter. Management has opted to increase the size of the group’s charter fleet despite marginally profitable chartering day rates and likely poor fleet utilization rates.
 

The concentration of customer, is consistent with the current market condition. Biz will eventually concentrate to the bigger customers, which are more survivable amid the current storm.

Yes, we have seen forfeitures and finished good in inventories, which warrant a close monitoring in the next few quarters.

"Poor return on investment for Charter"? Excluding the dividend income, the accounting margin is about 15% in FY2015. The estimated cash return (incl the non-cash depreciation charges) is >50%. I would say, the charter segment is still a cash cow in FY2015. Let's see what will happen in the next few quarters.

The bizarre        

Yard expansion onto Pulau Seloko. This is surprising given the management’s initiatives to pare down shipbuilding activities and reduce the workforce in Singapore and Batam. Furthermore, there are dozens of shipyards on Batam, which are affected by the oversupply in the tug and barge market and can be acquired relatively cheaply. The choice to expand shipbuilding facilities onto an undeveloped island, creating difficult logistics ferrying staff and materials/supplies back and forth in the future, is strange in my view given the other options and that there is no rush to expand at the moment.

I have a different view. To acquire the new land, has the following benefits, instead of M&A
- Firstly, the island is very close to the exiting yard, thus a favorable choice.
- Next, M&A will incur immediate up-front cost, but controlled incremental capex for the newly acquired island.
- Lastly, the best time to expand, is usually during the tough period.

(vested, and all comments are welcomed)

[Clement]

Increasing customer concentration risks. Revenue from 3 largest customers increased by 7% in 2015 and more importantly, now represent 62% of total revenue, compared to 42% in 2014.  The management’s strategy to broaden their customer and product base is therefore currently not bearing fruit.

Customer cancellations has led to a large build up in finished goods inventories. Income from deposit forfeitures of $2.5 million from none the year before has resulted in $32 million in unsold finished goods on the balance sheet.
 
Poor returns on investment in motor launches for charter. Management has opted to increase the size of the group’s charter fleet despite marginally profitable chartering day rates and likely poor fleet utilization rates.
 

The concentration of customer, is consistent with the current market condition. Biz will eventually concentrate to the bigger customers, which are more survivable amid the current storm.

Yes, we have seen forfeitures and finished good in inventories, which warrant a close monitoring in the next few quarters.

"Poor return on investment for Charter"? Excluding the dividend income, the accounting margin is about 15% in FY2015. The estimated cash return (incl the non-cash depreciation charges) is >50%. I would say, the charter segment is still a cash cow in FY2015. Let's see what will happen in the next few quarters.

The bizarre        

Yard expansion onto Pulau Seloko. This is surprising given the management’s initiatives to pare down shipbuilding activities and reduce the workforce in Singapore and Batam. Furthermore, there are dozens of shipyards on Batam, which are affected by the oversupply in the tug and barge market and can be acquired relatively cheaply. The choice to expand shipbuilding facilities onto an undeveloped island, creating difficult logistics ferrying staff and materials/supplies back and forth in the future, is strange in my view given the other options and that there is no rush to expand at the moment.

I have a different view. To acquire the new land, has the following benefits, instead of M&A
- Firstly, the island is very close to the exiting yard, thus a favorable choice.
- Next, M&A will incur immediate up-front cost, but controlled incremental capex for the newly acquired island.
- Lastly, the best time to expand, is usually during the tough period.

(vested, and all comments are welcomed)

Hi Cityfarmer, 

You brought up some nice points of discussion.

Market Conditions
As to market conditions, I am increasingly skeptical on the medium term outlook of offshore oil and gas service / equipment companies. Oil prices will most likely indeed rise due to current under investment affecting future supply as current wells hit the decline curve, but shale projects in the US and other areas (Argentina?) seem better positioned to pick up the slack. Offshore exploration and production, with the long time horizons and high initial costs will from now on have to grapple with new nimble competitors and even risks of ending up with stranded assets.

Customer Concentration 
It is nice that business is increasing with the largest customers. However, it is a risky proposition to depend increasingly heavily on them.  Management has indicated that it is actively seeking out new markets beyond the oil & gas sector and, from those statistics, it seems that the diversification initiative has not seen much success. 

Return on chartering investments
The “marginally profitable” assessment was in the words of the management and besides, the accounting profit margin tells only half the story doesn’t it, when it comes to returns on capital invested.

Yard Expansion
I agree that the island is very near to the current yard (600 meters or so away). However, this is distance by sea and I don’t think I have ever come across such an arrangement in a shipyard before.