Penguin International - UOB Kay Hian 2020-06-10: Expect A Slowdown In 2020, But Recovery In 2021

PENGUIN INTERNATIONAL LIMITED (SGX:BTM)

Penguin International - Expect A Slowdown In 2020, But Recovery In 2021

Penguin International held its AGM in May 20, and responded to questions on the impact of COVID-19 and low oil prices. Both the shipbuilding and chartering segments face headwinds as demand for its Flex Fighters and chartering falls.
To preserve cash, Penguin International has slowed down fleet expansion and stock vessel construction programmes.

We cut our 2020 EPS by 47%, and lower our PE-based target price by 29% to S$0.60.
Maintain BUY as we expect EPS recovery of 34% y-o-y for 2021.

With the collapse in oil prices during Mar/Apr 20, both of Penguin International (SGX:BTM)’s business operations have been affected as demand for both shipbuilding and chartering have fallen.
According to management, Penguin International’s charter rates for crewboats and ferries have taken a hit as oil majors start slashing costs in a bid to stay profitable. In response to this crisis, Penguin International’s management has slowed down its charter fleet expansion and stock vessel construction programme to preserve cash.

According to management, the oil crisis has affected Penguin International’s key market, Nigeria. As oil is Nigeria’s biggest industry, the drop in oil prices has led to a decline in demand for Penguin International’s Flex Fighters. This is significant as Nigeria contributes roughly 36-56% of Penguin International’s total annual revenue. However, we reckon that Nigeria’s ongoing piracy issues as well as the gradual recovery in oil prices will still help underpin demand for Flex Fighters going forward.

Being listed as an essential service, Penguin International was able to remain operational during the Circuit Breaker period in Singapore, but only with less than half of its foreign worker capacity. To mitigate the loss in headcount, Penguin International’s Singapore, PR and S-Pass staff chipped in to help. Furthermore, Penguin International’s Batam shipyard remained fully operational during the same period.

Management stated that although the COVID-19 pandemic has softened demand for new vessels, none of its clients have terminated any existing contracts for stock vessels, build-to-order vessels or vessels on charter. More than half of its stock vessels have been sold, with deposits of about 20-30% received.

Penguin International has expanded its vessel portfolio to include windfarm vessels, having successfully delivered two new windfarm vessels to a Taiwanese operator. Penguin International has also designed the world’s first aluminium accommodation and crew change boat for the offshore wind industry.
As the trend for offshore wind continues to grow, we reckon Penguin International could benefit from this industry trend.

According to ICC International Maritime Bureau’s 1Q20 piracy report, Nigeria retained its top spot for the most piracy attacks in 1Q20. For 1Q20, Nigeria had 11 attacks, more than double of long-time top spot contender, Indonesia. The report also stated that the Gulf of Guinea, where Nigeria borders, accounted for 45% of 1Q20 piracy attacks globally, implying a strong and resilient demand for safety vessels in that region.

Due to the sharp fall in oil prices, we reckon that demand for both shipbuilding and chartering will moderate in 2020, before picking up in 2021 and 2022. Hence, we have slashed our 20-22 earnings forecasts for both segments, forecasting revenue from the shipbuilding and chartering segment to drop by 4.6% y-o-y (+36.0% y-o-y) and 6.9% y-o-y (+36.0% y-o-y) in 2020 respectively.
We forecast Penguin International’s total revenue at S$129.4m (-29%), S$143.8m (-28%) and S$162.2m (-27%) for 2020-22 respectively. Our net profit forecasts for 2020-22 are S$13.0m (-47%), S$17.4m (-37%) and S$22.8m (-26%) respectively.

This is based on 7.6x 2021F PE, pegged to its long-term average mean (excluding outliers of > 2SD of 30x). The exclusion is primarily from the high base seen in 2016-18.
We believe that the market is severely undervaluing Penguin International’s healthy balance sheet and strong vessel portfolio.
See Penguin International Share Price; Penguin International Target Price; Penguin International Analyst Reports; Penguin International Dividend History; Penguin International Announcements; Penguin International Latest News.

Spike in oil prices. As the price of oil impacts offshore activity, a spike in oil prices would increase the demand for offshore crewboat chartering and shipbuilding.
Surge in vessel sales and orders. Stronger revenue contribution from unexpected for-stock vessel sales or BTO orders.

Llelleythan Tan UOB Kay Hian Research | John Cheong UOB Kay Hian | https://research.uobkayhian.com/ 2020-06-10

SGX Stock Analyst Report BUY MAINTAIN BUY 0.60 DOWN 0.850