• Penguin International’s FY20 core net profit of S$9.7m (-47.2% y-o-y) was below at 93%/94% of our/consensus FY20 (S$10.4m/S$10.3m) on lower net margins.
• The y-o-y revenue drop was unsurprising, but higher-than-expected operational costs led to lower net profit margins.
• We think investors may be more interested in Penguin International’s potential privatisation. We downgrade Penguin International from Add to HOLD with target price at the offer price of S$0.65.

Penguin International’s Revenue Decreased by 12.4% Y-o-y and Gross Profit by 17% Y-o-y in FY20

• Penguin International (SGX:BTM)'s FY20 revenue fell 12.4% on lower chartering (-22.4% y-o-y) and shipbuilding revenue (-9.8% y-o-y). Penguin International mentioned that its shipyards in Singapore and Batam delivered 27 new vessels in FY20, of which 52% were built for stock (BTS) and chartering (~14 vessels). The remaining 48% were built to order (~13 BTO vessels).
• Penguin International's FY20 gross profit fell 17% y-o-y as gross profit margin (GPM) narrowed to 28.1% (FY19: 29.8%).

Core Net Profit Fell 47.2% Y-o-y, No Dividend Announced

• Penguin International's FY20 core net profit (excluding S$3.5m government grant) was down 47.2% due to weaker revenue which led to lower operational leverage. Furthermore, tax expenses were higher mainly due to lower R&D tax incentives. Penguin International also did not announce a final dividend which was below our expectation.

A Potential Privatisation

• On 21 Jan 2021, Penguin International announced a voluntary conditional cash offer of S$0.65 per share by key management (Jeffrey Hing Yih Peir and James Tham Tuck Choong) and strategic investor, Fairy LP, owned by Dymon Asia Private Equity (SE Asia) II Ltd.
• The offer price of S$0.65 per share implies ~0.82x FY20 P/BV (close to its historical +1 standard deviation level).
• Penguin International’s net cash was ~S$35m in Dec 20. The last offshore & marine (O&M) privatisation was of PACC Offshore in 2019 by the Kuok Group at S$0.215 per share, i.e. ~1x historical P/BV.

Fine-tune FY21-22F Forecasts for Penguin International

• Penguin International gave the following guidance for its business segments:
  1. offshore wind (windfarm boats) remains fairly resilient,
  2. offshore oil and gas (crewboats) and maritime protection (security vessels) have weakened but stabilised, and
  3. there is a slow pick-up in tourism (passenger ferries).
• In order to conserve cash, Penguin International has either stopped or slowed some of its uncommitted build-for-stock vessels.
• We fine-tune our Penguin International's FY21-22F earnings per share forecasts for housekeeping purposes and also introduce FY23F forecasts.

All Eyes on Potential Privatisation of Penguin International, Downgrade to HOLD

• We like Penguin International as it is profitable to the offer price of S$0.65 per share; and subsequently downgrade Penguin International from Add to HOLD.
• Upside risks are higher vessel sales and gross profit margin.
• Downside risks are lower ship sales and chartering.

Source: CGS-CIMB Research - 15 Feb 2021