• Record quarterly revenue and earnings. No changes to our earnings forecast.
• No order book details but the outlook is positive based on the jump in inventories, assets held for sale and other payables.
• Balance sheet in net cash position of S$47.8mn, or 44% of the market capitalisation.
• Our BUY recommendation and target price of S$0.61 is unchanged.

The Positives

+ Shipbuilding revenue tripled during the quarter. Revenue was from the sale of ferries, security boats, patrol boats and fireboats. Other income declined due to fewer conversion and sale of crew boats into security boats. Charter income from crewboats grew on the back of an expanded fleet and higher charter rates. The company will be replacing older crew boats with their new Flex-42X series. The company has around 16 crew boats and could raise this to 20.

+ Strong balance sheet with net cash of S$43.8mn. The company exited end-June 2019 with net cash of S$43.8mn. In 1H19, cash from operations jumped by S$12.2mn. Bulk of the cash has been spent on expanding the crew boat fleet.

+ Inventory, assets held for sale and other payable rose a combined 46% YoY to S$55mn. Ironically having a large current asset/liabilities balance is positive for the company – higher inventories imply more vessels built to stock available for sale, higher assets held for sale would suggest the pending sale of converted crew boat; and when other payables rise, we are assuming an improvement in non-refundable deposits from clients.

The Negative

– Administrative expenses rose 30% YoY. The rise was in part due to the increase in headcount. We believe the company has been building up the product development team to expand the range of vessels that they can build.

Outlook

Without disclosing the order-book, we use the balance sheet as a precursor to the orders on hand. The key items on the balance-sheet (inventory, assets held for sale) point to a healthy order book for 2H19.

Maintain BUY with an unchanged target price of S$0.61.

We maintain our earnings forecast and target price. Penguin is riding on strong growth as it expanded shipbuilding expertise from merely crew/security boats into ferries, patrol boats and fire and safety vessels. Other drivers include competitors exiting or downsizing, recovery in oil and gas capital expenditure and crew boats replacing the more expensive helicopter mode of transport. Excluding cash, the stock is trading at PE of 3.5x FY19e.