SHIPBUILDER Penguin International : BTM 0% wants to tap the decarbonisation trend with electric vessels as well as vehicles for the booming offshore wind industry – even if it means stomaching lower margins for now.

“Sometimes the price to pay for sustainability is lower profitability,” the company’s managing director James Tham told The Business Times.

Under his leadership and that of executive chairman Jeffrey Hing, Penguin has spent the last decade diversifying its portfolio and geographical reach.

Back in 2012, it was selling high-speed aluminium crew boats and security boats in South-east Asia and West Africa. Its bestseller was an armoured security boat dubbed the Flex Fighter, much-used in Nigeria for anti-piracy operations.

“We were essentially a one-product, one-market company. We made good margins, but this wasn’t sustainable,” said Tham.

Since 2020, however, Penguin has been busy building its own stock of offshore wind farm crew transfer vessels (CTVs), as well as other green vessels. The group also introduced a ferry design in 2018.

In mid-2020, it delivered Singapore’s first hybrid-electric seagoing ship to Shell. This was followed by a 34-metre hybrid-electric patrol boat for the Maritime and Port Authority of Singapore (MPA) in April 2022.

It is building three pure-electric ferries and rapid shore-chargers to support Shell’s energy and chemicals park on Pulau Bukom. Dubbed the Electric Dream project, these will be Singapore’s first fully-electric seagoing ships.

Penguin has also ventured into new markets, including other parts of West Africa, the Middle East and Europe. Last year was the first year Europe surpassed Africa as Penguin’s largest market in terms of shipbuilding, repair and maintenance revenue. It contributed 41.5 per cent of this revenue, followed by Africa at 23.6 per cent.

Going green, earning less

Diversification means having to accept lower margins, said Tham.

Penguin posted a modest 1.9 per cent increase in total revenue to S$135.2 million in FY2022, from S$132.6 million the year before. Gross profit margins fell to 26.6 per cent from 28 per cent, weighed down by lower shipbuilding income. Net profit was S$10.6 million, down 4.1 per cent from S$12.7 million the year before.

The group used to command margins of over 30 per cent in “the good old days” between 2012 and 2014, he noted.

“You’re having to change the whole industry’s mindset. For ships that are not conventionally powered, there’s always going to be a premium; but there are not many charterers out there who will willingly pay for decarbonisation activity,” he said.

Premiums are currently lower than what Tham believes are reasonable, given the extra effort and risk Penguin takes on to integrate new equipment and systems into existing vessel designs.

“That’s one reason our margins are being squeezed… There are a bit of loss-leaders in the market,” he said.

As part of its diversification efforts, Penguin has also taken on more build-to-order projects than build-to-stock ones. Build-to-order vessels command half the margins of build-to-stock ones.

The group’s shipbuilding and chartering activities in the traditional offshore oil and gas sector still form a core revenue stream, especially to make up for the shortfall in its green initiatives.

“Oil and gas may seem like a dirty word; but often the dirty word is what keeps us going, keeps the lights on,” he said.

Tham is, however, hoping for higher margins in time to come: “Once Penguin is well-known (for its products), once the market accepts that there’s going to be cost escalation, we hope we will be rewarded,” he said.

Environmental regulations are also putting more pressure on shipowners to go green: In March, MPA announced that all new harbour craft must operate on low-carbon energy solutions by 2030.

Less cash, more debt, lower margins

Penguin’s capital structure is not what it was. Gone are its days as a company “fondly” remembered by some shareholders as one with “a lot of cash and zero debt”, Tham said.

But he makes no apologies: “In order to diversify, to grow, we had to utilise more cash. We had to take on more debt. There are no two ways about it.”

He has no intention of propping up Penguin’s low trading volumes, which have plunged further after an unsuccessful privatisation bid two years ago. The monthly average of the group’s cumulative trading volume in the last three months was 180,000.

In January 2021, a consortium comprising Tham, Hing and a Dymon Asia fund teamed up to make an offer for all the remaining shares it did not own in Penguin. It ended up with a collective stake of over 80 per cent, falling short of the over-90 per cent needed to take the group private.

Tham declined to say whether there might be another privatisation bid.

Shares of Penguin closed at S$0.70 on Mar 24 (Friday). This gives the counter a market capitalisation of S$170.2 million, with a price-to-earnings ratio of 14.6 and a price-to-book ratio of 0.8.

Rather than improve trading liquidity, his priority is to grow the business through organic growth.

Penguin’s last acquisition was in 2004, when it bought bunkering company Soon Tian Oon. But the company “didn’t turn out to be a good investment”, and so it was wound down in 2013.

In Tham’s view, taking on acquisitions is “instant gratification”: “I don’t think we’d be short of people who would help fund our growth through M&A. But we don’t believe in that… We go slow and steady.”

The group has received proposals from companies looking for buyers, but these came with inflated valuations that “do not take into account huge liabilities and challenges”.

“Many of these companies are heavily indebted; even those that do not have legacy problems. Debt is needed to fuel growth, but over-reliance on debt could eventually kill a company,” he said.

To raise funds for future investments, Penguin plans to take on more borrowings.

The group’s cash and cash equivalents stood at S$12.5 million as at Dec 31, 2022, down from S$19 million at end-2021. Total bank borrowings rose 56.8 per cent year on year to S$23.9 million, of which S$15.9 million was long-term debt.

Yet, Tham considers the group “fairly conservative” relative to its peers: “We are taking on more debt, but we take on debt selectively. And we’re still conserving cash as much as we can.”

Penguin has also been fortunate to secure financing for its vessels and shipbuilding facilities, especially at a time when shipowners are struggling to do so for the offshore oil and gas segment amid credit tightening by banks. The group currently has shipyards in Singapore and Batam.

Having Dymon Asia on board as a shareholder has helped in this area. “Dymon played a part in us defining the Electric Dream project with Shell better, and also in securing green financing with DBS,” he said. “Their investment in the group is a big vote of confidence.”

Besides Europe, Penguin is eyeing Taiwan, Japan and South Korea as other growth markets for offshore wind. In March, the group marked its first Japanese transaction with the sale of a CTV to Japanese shipper NYK Line.