Downgrade to ACCUMULATE with a lower target price of S$0.55 (prev. S$0.88).
The biggest worry will be trade receivables and inventory of vessels built to stock. During such a stressed environment, the risk will be elevated from customers defaulting payments and inventory becoming unsold. In 2016 downturn, Penguin swung into losses and revenues plunged by 72% (Figure 2). The difference in this cycle is the larger net cash on the balance sheet (from S$24mn end 2015 to S$60mn end 2019) and a more diverse portfolio of vessels built.
With such an uncertain earnings outlook, we will use price to book as a gauge to valuations.
The 10-year price to book average is 0.7x, with a range of 0.5x to 1x. Penguin can ride out the downtrend in the industry with their large cash hoard.