Oceancash Pacific Bhd
(March 6, 43.5 sen)
Maintain buy with a target price (TP) of 51 sen: To recap, Oceancash’s financial year 2018 (FY18) core earnings tumbled 32% year-on-year (y-o-y) to RM6.7 million, as its hygiene segment’s export sales recorded a sharp decline. The impact was more heavily felt from Thailand, related to the discontinuation of orders from the second quarter of FY18 (2QFY18) for a high-value yet a highly-profitable product. This was further aggravated by one-off non-cash charges, alongside production issues faced by the hygiene segment from 2QFY18 (2QFY18 PBT margin: 3.8% versus 7.6% in 1QFY18), which was only resolved in 4QFY18 (8.3%, ex-tax asset reversal). The hygiene PBT margin shrunk six percentage points y-o-y to 5.1% in FY18.

 
Nevertheless, the management has acquired a new key foreign customer within the hygiene segment and is in the latter stages of qualifying for another major customer. All in, we believe sales from the new foreign customer, alongside the potential new client, would begin contributing materially from the second half of financial year 2019 (2H19) and make up for the loss in hygiene sales — raising utilisation rates from about 70% in 2018 to 75% — albeit margins would likely be lower. Following a full-year earnings contribution from its new clientele, we foresee that the hygiene segment’s earnings growth would similarly remain robust in 2020 and contribute to our projected group 29% y-o-y EPS growth.

The insulation segment fared well in 2018 — sales (+5.2%) and PBT margin (+2.7ppts) expanded y-o-y — on higher contributions from the local (more than 50% utilisation rate) and Indonesian automotive markets (about 45-50% utilisation rate). A stable outlook seen for the auto markets should remain supportive of Oceancash’s felts businesses in 2019. Locally, we understand that Oceancash has been supplying felts for new models (Perodua Aruz, Toyota Vios/Yaris, etc) as well as existing low- to mid-end models such as Perodua Myvi/Axia and Proton Saga/Iriz, which incorporate more felt insulation. This should buoy its local felt sales, as our auto analyst expects low- and mid-end models to outperform the industry’s total industry volume (TIV) growth in 2019.

We understand that the group has shifted its focus to setting up operations in Thailand for its insulation business. The management is currently looking to acquire a plot of land for the construction of a felts production facility, with the tentative view of setting up a trading warehouse for its hygiene products as well. However, the earliest expected date for commencement of operations would be from 2H2020, in our view.

Therefore, we reiterate our “buy” rating on Oceancash with an unchanged TP of 51 sen based on a PER of 14 times 2019 estimate EPS. The stock is currently trading at a discount to its five-year historical mean forward PER of 12.3 times, as well as to its peers within the non-woven hygiene (41% discount) as well as auto parts (26% discount) segments. With its share price hovering at a two-year low, we believe this presents a good opportunity for investors to tap into Oceancash’s solid recovery prospects in 2019 and subsequently strong earnings expansion heading into 2020 (on current target valuation metrics, our 2020E fair value estimate would be 66 sen, offering implied upside of 59%). Key downside risks are 1) lacklustre felt sales due to weaker automotive demand, and 2) loss of orders in the hygiene segment. — Affin Hwang Capital, March 5