Company Background

In 1995, Penguin International Ltd (Penguin) built its first aluminium boat. Listed on the SGX in 1997, it has since built more than 200 high-speed aluminium vessels, including 120 of its trademark Flex crewboats/security boats. The boats are sold under the Flex brand. Penguin has two shipyards, Tuas (Singapore) and Batam (Indonesia). A major milestone was reached when it sold its regional passenger ferrying ticketing business in 2011 to Sindo Ferry. This was a loss-making business which was highly exposed to fuel price volatility and intense competition.

Almost 80% of Penguin’s revenue now comes from shipbuilding and ship repair. The remaining 20% of revenue is from charter income. Penguin owns 15 crewboats for charter income and several passenger ferries, harbour launches and a landing craft for special projects in Singapore. The common feature of all Penguin boats is the aluminium material and the speed. Such boats can travel as fast as 30 knots as compared to 10-12 knots by a steel vessel of similar specifications. Penguin’s business model revolves around constructing vessels for their stock programme (i.e. built without an order). In addition, Penguin will opportunistically dispose crewboats on charter after converting them into security vessels when the prices are attractive.

Investment Merits

1. Expanded capabilities and opportunities. Penguin has honed expertise in crewboat and security vessels. In December 2016, it was awarded a contract by the Singapore Ministry of Home Affairs to build and maintain Marine Fire and Rescue Vessels. It also secured new orders for patrol boats and windfarm support vessels in 2018.
2. Rising charter income. Following the deep lull in 2016, demand for crewboats is on track for a recovery. Firstly, oil and gas companies are switching from costly helicopter transportation to more economical and safer crewboats. Secondly, a rebound in oil prices has resurrected global offshore rig activity, including in Malaysia – Penguin’s key market.
3. Healthy balance sheet and attractive valuations Penguin has maintained a conservative net-cash balance sheet for the past 12 years and management has been prudent in cash deployment. We find the current valuations attractive at 3x PE FY19e (excluding cash).

Outlook

We are positive on its outlook. The strong balance sheet has helped Penguin weather the offshore and marine downcycle of 2015-17. Several competitors have either exited the business or fallen under debt restructuring. The current upturn in oil prices and offshore rig activity is another positive for the company. We also see Penguin diversifying outside its primary oil and gas vessels into other categories, including government and offshore windfarm vessels.

Initiating coverage with BUY rating and target price of S$0.61

We initiate Penguin with a BUY and a target price of S$0.61. We value Penguin at 5x PE, excluding its S$41mn net cash. Shipyards of similar size traded at 5x PE on average back when the industry was in at steady state.

Revenue

Shipbuilding (77% of FY18 revenue): Penguin builds crewboats, security vessels, ferries and patrol boats. In recent years, it has ventured into constructing patrol boats and fire and rescue vessels. Vessels can either be built-to-order or built-to-stock. For the former, revenue is recognised on a percentage of completion method. Penguin does not disclose its order books. Built-to-stock ships are parked as inventory before disposal. The average selling price of a security boat is around US$5mn. In 2018, 59% or S$48mn of revenue was from the sale of stocked Flex crewboats/security boats. The balance S$33mn were newbuild orders.

Ferry and charter income (23% of FY18 revenue): Charter income from 30 vessels: 15 are crewboats and the rest specialised vessels utilised in Singapore for ferry support, landing craft and harbour motor launch. Its crew boats are deployed in Malaysia, mainly by the oil and gas industry to transport crews from shore to rigs or between rigs. Spot rental is US$4,000-5,000 per day. Most are rented for 180 days with a few under-3-year charters that come with lower rates. We expect the company to expand their fleet as demand is improving. Penguin also sells its crewboats as security vessels when prices are attractive. Gains are recognised as other income. In 2018, Penguin sold 3 Flex crewboats, which were converted into security vessels.

Types of boats built by Penguin:

1. Offshore Crewboat (Flex brand): Used in offshore oil and gas activities to ferry crew from onshore to offshore rigs or platforms. Alternatively, it is used to transports crew between rigs. Crewboats are branded under the Flex series (e.g. Flex-36, Flex-40 series), with the latest vessel being a Flex-42X (Figure 1). This vessel is installed with CCTVs and electronic fuel management. Crewboats require 6 to 7 months to build.

2. Armoured Security boats (Flex Fighter, Figure 2): These are aluminium armoured vessels sold to oil companies for patrolling their offshore oil facilities in Nigeria. Its boats escort tankers and patrol offshore platforms. Demand for Flex Fighter boats is around a dozen a year.

3. Passenger Ferries (Figure 3): These are aluminium boats to ferry passengers in the leisure industry, which take 8 to 9 months to build. Customers typically want these ferries to be fast-speed and fuel-efficient, as well as to be able to accommodate as many passengers as possible. Penguin has sold one unit of Flex Ferry to an African customer. This ferry is a large monohull passenger ferry with high-speed craft safety code. The older ferry model called Queen Star had been sold to customers such as Sindo Ferry, Shipping Corporation of India and Horizon Fast Ferry.

4. Patrol boats: Penguin has sold seven patrol boats to an Australian customer. These are for law enforcement and search and rescue purposes. Speed and crew comfort are two major criteria for patrol boats.

5. Wind farm support vessel: Secured a contract in 2018 for two vessels used for transferring crew from shore to offshore windfarm sites in Taiwan.

6. Fire and rescue vessel (Figure 4): In December 2016, the Singapore Ministry of Home Affairs awarded a US$23mn contract to a consortium comprising Penguin and ST Marine for a design, construction and system maintenance programme involving a heavy marine fire vessel, a heavy marine rescue vessel and a marine rescue vessel.

The common feature of all these boats is the aluminium design and speed. We believe the capacity of the yard is 30 to 40 vessels per year. It requires 7 to 8 months to build a crewboat. Challenges in building aluminium vessels are the hull form design, weight management, space planning and selection of equipment, machinery and material.

Cost

Charter costs include the costs of crew on board (around eight per vessel) and vessel maintenance. Fuel costs are borne by customers. The largest cost component of crewboats is the engine. For instance, three Caterpillar C32 ACERT engines are required in one crew boat.

Cash-flow

Recurrent cash flow is derived from its chartering business. In shipbuilding, customers place 10-30% deposits upfront when they place orders. Built-to-stock vessels, once completed, are recognised as inventory. They are recognised as sales upon delivery and full payment. Penguin will build vessels for stock only with cash in hand and when they are not geared up.

Balance Sheet

Asset composition: plant and equipment 40% (buildings, motor launches, machinery), cash 20%, inventory 10%, trade receivables 10% and contract assets 7%. Contract assets are vessel-building costs yet to be recognised as revenue. There is also an original S$8mn invested in SGX-listed Marco Polo Marine. Its value had been written down to S$5.1mn as at end-December 2018.

Liabilities composition: 44% are other payables and accruals (bulk are accrued operating expenses and deposits received) and 33% is trade payables.

Industry

Since 2008, the top five largest aluminium crew boat manufacturers in the world are Penguin, Grandweld (Dubai), Strategic Marine, Marsun and NGV Tech. Of the top 10, around one-third are being liquidated or under some form of restructuring. These include Strategic Marine (owned by Triyards), NGV Tech and Nautic Africa. Meanwhile, competitors in ferry construction are Cochin Shipyard, Damen Shipyards (Netherlands), Grandweld and L&T.

In 2014-18, around 192 aluminium (30m to 50m-length) crewboats and crew/supply vessels were built globally. Around 68 were from Penguin’s yards. In 2014, there were 78 of such boats built. This dwindled to only 9 and 16 units in 2017 and 2018, respectively. Penguin’s share of all such vessels built in 2017/18 was 60%, the single largest market share.

Outlook

We are positive on Penguin’s outlook.

Firstly, improving oil prices have fuelled a revival in offshore activity. The number of offshore rigs globally has recovered from their low at end-2017 (Figure 7). The recovery is visible in countries where Penguin has a large presence, namely, Nigeria and Malaysia (Figure 8).

Secondly, the net cash balance sheet has allowed Penguin to weather the 2015-17 vicious oil and gas downturn. Several major competitors have left or downsized their activities. Over the past two years, Penguin has captured a large share of the crewboat and security boat market.

Thirdly, Penguin is securing more orders outside its crewboat and security boat business. It has successfully diversified outside this core business to secure new orders from patrol boats, offshore vessels and rescue and fire safety vessels.

Build-for-stock is not applicable for every type of vessel. It carries the risk of inventory overhang. For this model to work, the vessel must have a robust and ongoing demand. The advantage for such models are the higher margins and ability for customers to secure their vessels faster and in turn, expedite their own charter income.

Investment Merits

1. Expanded capabilities and opportunities. Penguin has honed its expertise in crewboat and security vessels. In December 2016, it was awarded a contract by the Singapore Ministry of Home Affair to build and maintain Marine Fire and Rescue Vessel. It also also secured new orders for patrol boats and windfarm support vessels in 2018.

2. Rising charter income. Following the deep lull in 2016, demand for crewboats is on track for a recovery. Firstly, oil and gas companies are switching from costly helicopter transportation to more economical and safer crewboats. Secondly, a rebound in oil prices has resurrected global offshore rig activity, including in Malaysia – Penguin’s key market. In June 2017, Petronas Carigali terminated their charter contract for five Eurocopter EC225 Super Puma helicopters with MHS Aviation.

3. Healthy balance sheet and attractive valuations Penguin has maintained a conservative net-cash balance sheet for the past 12 years. We find the current valuations attractive at 3x PE FY19e (excluding cash).

Valuation

We initiate coverage on Penguin with a BUY rating. As there are very few direct comparables, we use the PE ratios of two Singapore yards when the shipbuilding cycle was in a steady state cycle. During the normalised shipbuilding cycle of 2012-15, both Triyards (Figure 9) and Nam Cheong (Figure 10) traded at an average 5-8x PE. Although, they build different vessels and have more geared balance sheet profiles, both can be considered proxies for Penguin as their yard sizes are similar. We used the lower PE average of 5x to value the business and added back the net cash from FY19e.