• Earnings and revenue was a beat. We raise our FY19e/20e earnings by ~10%.
• The YoY comparables will look exaggerated due to the seasonally weak quarter last year. The rolling 4-quarter (or annual) earnings run-rate is a healthy S$21mn.
• Record net cash position of S$53.1mn and other balance sheet metrics suggest another healthy quarter ahead.
• We are raising our target price to S$0.93 (5x PE excluding net cash) as we roll over our target price to FY20e net earnings. Our BUY recommendation is maintained.

The Positives

+ Revenue growth for both business segments. The more recurrent chartering revenue rose 16% YoY whilst shipbuilding revenue jumped 65% YoY. Penguin is looking to build up their charter fleet as it mentioned that charter rates and utilisation rates are improving.

+ Net cash at a record S$53.1mn. Net cash on hand stands at S$53.1mn, which is a record for Penguin. The cash constitutes 1/3 of the market capitalization and can support Penguin’s build to stock of vessels.

+ Inventory, assets held for sale and other payables rose a combined 14% YoY to S$61mn. As mentioned before, there is no order book disclosed. We use the combination of these three balance sheet items as a proxy to the status of the order book. The 20% YoY jump in inventory would suggest strong shipbuilding revenues for the next quarter, in our opinion.

The Negative

– Assets held for sale was zero. This implies no crewboats for conversion and other income will be light in the coming 4Q19e.

Outlook

Based on the status of the balance sheet, the outlook appears positive. Inventories at record levels are oddly positive. Management is conservative and builds to stock when there is sufficient visibility in orders. Inventory comprises of security boats, crewboats, passenger ferries and offshore windfarm crew transfer vessels (new category for Penguin). The two key oil and gas vessel markets for Penguin is Malaysia and Nigeria. After a lull, offshore rigs deployed in both countries is back to 4-year highs.

Maintain BUY with a higher target price of S$0.93 (previously S$0.61).

Sources of growth for Penguin is several: (i) tailwind from the recovery in oil and gas offshore activity; (ii) replacement of helicopters to crewboats; (iii) penetration into new vessel types (namely patrol boats, offshore wind farm support vessels and fire and safety vessels). Excluding cash, the stock is trading at PE of 3x FY20e.