• 4Q19 earnings and revenue exceeded our expectations. PATMI beat our estimates by 11% due to lower operating expenses and taxes.
• Balance sheet and commentary from management reinforce the upbeat outlook for FY20e.
• Net cash at a record level of S$59.8mn (+43% YoY). Dividends raised by 40% to 1.75 cents.
• The outlook remains positive. Penguin is diversifying its customer base into new geographies and new products. Our target price is lowered to S$0.88 from S$0.93 (5x PE excluding net cash). We reduced our FY20e earnings forecast by 12% as we lowered our charter income estimates. Our BUY recommendation is maintained.

The Positives

+ Net cash at a record $59.8mn or up 44% YoY. The cash represents 40% of the market capitalization. The high cash levels will enable Penguin to increase its build-to-stock vessel inventory. Cash from operations in FY19 more than doubled to S$30.6mn despite higher working capital needs, driven by higher inventory levels.

+ Orderbook proxy* doubled YoY to S$86.8mn. The doubling of inventory to S$42mn was attributed to an increase in build-to-stock vessels such as security boats, crewboats, windfarm vessel and ferries. The build-up of inventory is not an indication of excess stock but rather padding inventory in anticipation of sales. We think that the rise in other payables is driven by customer deposits for these vessels. It is indicative of the likelihood of a buyer for the inventory on hand.

*Recall that the company does not disclose the order book. We built an orderbook proxy using the combined value of inventory (vessels built to stock), held for sale assets (crewboats converted to security vessels for sale) and other payable (largely non-refundable customer deposits).

The Negative

– Charter growth was slower. Charter revenue was weaker than expected., only up 0.8% YoY. We believe charter revenues were hurt by the company’s preference to renew their fleet by selling older vessels (any gains recorded as under other income) and replacing the fleet with new builds. We expect the higher capex of S$22.2mn will go towards supporting the renewal of the existing fleet of crewboats (Flex-42X). 

Outlook

The drivers to growth for Penguin are intact.

• Successful diversification into other vessel types such as patrol boats, rescue vessels, windfarm crew transfer, etc.
• Expansion of customer base in other geographies – Taiwan and Australia. Management also mentioned Europe as a new market.
• Recovery in oil and gas activity.
• Reduced competition in aluminium type of vessel builders in Asia.
• Replacement of helicopters with cheaper crewboats.
• Consistent demand for security vessels in Africa, namely Nigeria. Africa is the largest market for Penguin (FY19: 56% of sales).

Maintain BUY with a lower target price of S$0.88 (previously S$0.93)

We maintain our BUY recommendation. We find the current valuations attractive at 3x PE (excluding cash), strong balance sheet and visible growth outlook for FY20e. Our target price is based on 5x PE FY20e (excluding cash and interest income). The industry had traded at an average of 5x PE in previous shipping building cycle. As charter income improves, there will be more scope to raise the valuation multiples, in our opinion. Charter income is more recurrent, scalable and enjoys higher margins. Penguin has cost and service advantages in charter business as designer, builder and operator. Our target price is lowered as FY20e earnings is reduced by 12%. We reduced our charter income estimates for FY20e.