Harvesting the Fruit of our Labour We have a lot to be thankful for this year. Not only have we ended a three-year earnings drought in Penguin with a modest turnaround profit of $1.2 million in FY2006, we have successfully transformed our company into a truly integrated group with independent business units working together to capitalise on the buoyant shipping and offshore markets. In FY2006, our gross profit margin rose year-on-year from 25% to 39%, cash on hand rose 41% to $20 million and new shipbuilding orders rose 9% to US$12 million. Apart from a return to profitability, our earnings base is now more stable and sustainable, with a focus on overseas projects and the offshore sector. To quote our Executive Chairman, the Penguin of today is more than just a regional ferry operator. We are a global marine and offshore services company, specialising in the construction and operation of commercial high-speed vessels.

Indeed, we are now starting to harvest the fruit of our two-year restructuring program that called for a reduced dependence on ferry ticketing in favour of ferry chartering; a relentless marketing drive to build crewboats and ferries for third-party shipowners; and the sale of underutilised or aging vessels, paving the way for fleet renewal.

Breaking the Mould
In FY2006, ticketing-based ferry operations at Penguin Ferry Services (PFS) turned a profit while ticketing revenue as a percentage of group revenue remained below 35%, compared to over 50% a few years ago. Over the same period, our ferry chartering and overseas ferry projects unit, Penguin Marine and Offshore Services (PMOS), increased its share of group revenue from 1% to 3%. PMOS deployed three ferries to the Philippines under a bareboat charter agreement with the Aboitiz group - our first such agreement with an overseas shipowner - and signed a time charter agreement with Tian San Shipping to jointly provide high-speed passenger ferries to the local petrochemical industry. The bulk of these charter revenues will kick in this year.

In shipbuilding, Penguin Shipyard International (PSI) in FY2006 signed up US$12 million worth of new orders from third-party shipowners, versus US$11 million in FY2005, and delivered four patrol craft and two crewboats. More significantly, our 36-metre crewboat design jointly developed by PSI and Pelican Offshore Services (Pelican), the offshore chartering arm of Penguin, has found favour with other crewboat operators.

As part of our ongoing vessel trading strategy, Pelican sold two crewboats for a profit in FY2006 and placed an order for two more 36-metre crewboats with PSI at market prices. To reiterate my message from FY2005, the sale of old vessels not only generates cash for more profitable businesses, it also lightens the yoke of depreciation and paves the way for renewing our fleet.

In a mould-breaking move, Pelican last year acquired our first Anchor Handling Towing and Supply vessel (AHTS), “Pelican 28”, which is currently on a long-term time charter with an oil company in Vietnam.

In another coup, Pelican in February 2007 signed a US$23-million contract with the Abu Dhabi National Oil Company on behalf of PSI to build three steel Fast Supply Intervention Vessels (FSIV). Not only is this our single largest contract and our first Middle Eastern job, it is also our first steel vessel order in our 12 years of shipbuilding.

On the corporate front, we have devolved operational decision-making to our business units and increased the paid-up capital of four of our subsidiaries - PFS, PMOS, PSI and Pelican - to between $2 million and $15 million, while promoting some business unit managers to corporate directors of their respective businesses.

This is part of our strategy of streamlining decision-making process between holding company and subsidiaries, and positioning the business units to enter into major contracts and partnerships in their own right. Over the longer term, the empowered subsidiaries will attract their own capital for business expansion. To a large extent, our destiny is now in the very capable hands of our business unit managers.

We also acquired a small industrial services company, Marlin Industrial Services, which specialises in the provision of industrial scaffolding services to the petroleum, power, petrochemical and pharmaceutical industries. We plan to use Marlin as a platform to venture farther into the field of industrial and offshore services.

Capital for Growth
Our $30-million convertible bond program with New York based D.B. Zwirn was by far the strongest affirmation yet of our revitalised company. Proceeds from this exercise, along with cash generated from operations, will be used to take on more third-party shipbuilding orders; build and acquire new ferries, bunker barges, crewboats and other offshore support vessels; and invest in companies in the marine and offshore industries.

Bear in mind that we are in a business that is capital intensive - both in shipbuilding and shipowning - and we are just starting to develop our new shipyard in Batam and refleet our vessels. All this calls for cold, hard cash. Thus, the dilutive effect of the bond conversions is far outweighed by the returns from our capital investments.

At the end of the day, we have a strong balance sheet with a low debt-to-equity ratio of 32%, which compares favourably with other listed marine and offshore companies in Singapore.

Prospects and Outlook
For the coming financial year, we are planning further improvements to our operations and corporate structure, as we seek to broaden the breath and depth of our business. This includes renewing our fleet, implementing a “production line” process at our existing shipyard to build more crewboats and FSIV, completing our Batam shipyard and investing in like-minded companies.

There is no better time to launch our new “leaner and meaner” Penguin logo!


Warmest Regards,
Mr. Yong Chor Ken, Alex
Managing Director