Penguin International

[dydx]

Hi dydx,

Interesting fact, given that USD has strengthened another 4.5% against SGD in the past 3 months, wont it mean Penguin's forex loss in this quarter will be approx 2 mil in light of its increasing revenue. Perhaps that's an explanation why the market is so bearish against it

Well, we know that such forex losses - aptly described as "net fair value loss on derivatives" - are more accounting in nature based on revaluation carried out on B/S cut-off dates, and the underlying forex contracts (whether straight forex forward or forex option contracts) are meant to protect the expected profits and margins as well as the net cash flow of Penguin's contracted boat building contracts and sales going forward. While accounting wise such losses - depending on the extent of a further fall in the USD/SGD exchange rates - will reduce Penguin's reported PBT in the short term, they would not negatively impact Penguin's expected profits to be realised from the boat building contracts in the next few quarters when the boats are completed and delivered. But for all we know the management could have already decided to stop such hedging forex contracts and allow Penguin to ride on the current rising trend of the USD/SGD rates. If this is the case, and if the USD continues to appreciate vs. SGD, Penguin's OP and margins would stand to enjoy an extra boost from the positive forex impact. All these will depend on the management's forex forecast and decision whether to hedge or not.

Realistically speaking, forex losses should not hurt Penguin's real profitability of its boat building activity over time too much as the GP Margin at a high of approx. 35%, and the short lead time of their boat building contracts, together would cushion and limit their negative impact. As well, it is also unrealistic to assume the USD to continue rising indefinitely.

Shareholders can and should ask questions on forex hedging during the AGM.