Good growth prospects seen for OCP’s non-woven hygiene unit

TheEdge Mon, Jan 06, 2020 09:56am - 4 years View Original


Oceancash Pacific Bhd
(Jan 3, 44.5 sen)
Maintain buy with an unchanged target price (TP) of 61 sen:
We remain positive on Oceancash Pacific Bhd’s (OCP) business outlook after our recent meeting with its management. We continue to like OCP, considering the: i) favourable growth prospects in the non-woven hygiene segment; ii) steady contribution of foreign felt sales from Thailand and Indonesia; as well as iii) strong management team with in-depth technical know-how. At 10 times financial year 2020 estimated (FY20E) price-earnings ratio (PER) on the back of a projected earnings-per-share (EPS) growth of 33% for FY20E, OCP’s valuation looks appealing. We reiterate our “buy” call with an unchanged TP of 61 sen.

Profitability of the insulation segment was flat in the cumulative nine months of FY19 (9MFY19) despite higher felt sales (+6% year-on-year [y-o-y]) as this was largely offset by weaker profit before tax (PBT) margins (-1 percentage point [pps] to 18.7%, exacerbated by adverse foreign exchange movement in first half of FY19 [1HFY19]). Prospects-wise, we believe the increasing contribution from Thailand and Indonesia (foreign felt sales accounted for about 61% of 9MFY19 insulation revenue) should be more than sufficient to cover for the expected shortfall in local felt sales (estimated 2020 total insured vlue forecasts lower by 1% to 590,000 units).

Elsewhere, construction of the felt production facility in Thailand remains on track to be completed by 2HFY20, and OCP is planning to relocate one of its two existing Malaysian production lines to tap the strong demand for resinated felt and increase utilisation of excess capacity (current utilisation rates: estimated 50%). Locally, we understand OCP has been supplying felt to Proton refreshed models (Saga, Iriz and Persona), and with this track record, the company is hopeful to participate in the Proton completely-knocked down (CKD) X50 supply chain moving forward. We think OCP may give the CKD X70 contract a miss due to unfavourable pricing, similar to our observation of other auto-parts players.

Outlook for the hygiene segment still looks promising — 9MFY19 PBT rose by 10% y-o-y to RM2.5 million, on higher revenue (+1% y-o-y) and improvement in PBT margins (+0.5ppt to 6.1%). We believe the cheaper resin cost (estimated 80% of hygiene’s raw material costs) will likely see an uptick in hygiene’s margins in the coming quarters.

Meanwhile, we learnt that OCP recently increased hygiene’s production capacity to 600 tonnes per annum (+25% from 480 tonnes per annum) to cater for the growing demand of non-woven products for one of OCP’s major customer. We gather that this customer, one of the largest hygiene product companies in Asia, is setting up a regional hub in Malaysia, which bodes well for OCP’s hygiene long-term revenue growth.

Besides that, we also gather that OCP is still in product development stages with a potential major customer, which is a leading multinational personal care corporation.

We are maintaining our TP at 61 sen based on an unchanged target PER of 14 times applied on FY20E EPS, as we keep our earnings forecasts unchanged and reiterate our “buy” call. At 10 times FY20E PER, the stock is currently trading at a discount to its three-year historical mean forward PER of 16 times, as well as to its peers within the non-woven hygiene (average 18 times) and auto-parts (average 12 times) segments. Downside risk to our call includes loss of key customer, slowdown in automotive sales, enhanced competition and overall weaker demand. — Affin Hwang Capital, Jan 3

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