Looking for a Stronger 2H18

Oceancash delivered a 1H18 core net profit of RM4.2m (-8% yoy) which came in below our and consensus forecasts. Topline was hampered by weakness in both the hygiene and insulation divisions. Margins were also affected by higher operating expenses in the hygiene division, as it ran into process inefficiencies in 1H18. Going into 2H18, we expect improvements from the insulation division in tandem with increasing automotive sales, as well as recovering margins in the hygiene division. We maintain our BUY rating with a revised TP of RM0.77.

1H18 Core Earnings Below Expectations

Oceancash recorded a net profit of RM3.8m (-15% yoy) in 1H18 which came in below expectations (38% of our full-year estimate). This decline was due to a decrease in revenue as both the hygiene and insulation divisions recorded weaker sales, particularly the hygiene division, due we believe to the stronger Ringgit yoy leading to a lower export revenue in Ringgit terms. Higher operating expenses also caused significantly lower margins in the hygiene division. On the other hand, the decline in revenue in the insulation division was affected by lower sales in Indonesia.

2Q18 Relatively Weak

The relatively weak 2Q18 core net profit (-34% qoq) was mainly affected by lower margins in the hygiene division due to higher operating costs. This was on top of relatively weaker qoq topline for both the hygiene and insulation divisions. The insulation division was also affected by the shorter working month in June due to festive holidays. A transfer listing expenses was also recorded during the quarter, amounting to RM342k.

Expecting a Stronger 2H18

We believe that the strong automotive sales recorded during the zerorated GST period could buoy felt sales in 3Q18. These effects have already been seen in 2Q18, as the domestic insulation division revenue saw improvements from the local automotive and air-conditioner markets. We also believe that margins for the hygiene division should recover in 2H18 on the rectification of the process inefficiencies seen in 1H18.

Maintain BUY With a Lower TP of RM0.77

We cut our 2018-20E EPS by 6-11% in view of the earnings miss and lower our TP to RM0.77 based on an unchanged PER of 15x on FY19E EPS. But we maintain our BUY call on the upside potential. Key downside risks: fiercer competition in the hygiene division and weak felt sales.

Source: Affin Hwang Research - 3 Sept 2018