Oceancash’s 9M18 core earnings came in below expectations at 65% of our full-year forecast. This was mainly due to the underperformance of the hygiene division, which saw lower revenues and margins. However, the insulation division performed relatively well, which was also partly boosted by strong automotive sales during the tax holiday. As we believe the underwhelming margins will improve moving forward, we maintain our BUY call with a lower TP of RM0.68 (from RM0.77).

9M18 Earnings Below Expectations

Oceancash recorded a core net profit of RM6.4m (-15% yoy) in 9M18, which came in below expectations (65% of our full-year estimates). The main cause for this deviation was the hygiene segment, which recorded a decline in 9M18 revenues (-6.8% yoy) and a sharper decline in segmental pretax profit (-56.8% yoy). This was in tandem with a decline in sales to Japan, Thailand and Korea, which we believe was affected by the strengthening of the RM against US$ on a yoy basis (average USD/RM – 9M18: 0.2506 vs 9M17: 0.2302, +8.9% yoy). On the flipside, the insulation division posted revenue growth of 4% yoy and a much larger 62.5% increase in segmental pretax profit, which we attribute to increased utilisation of its production lines, particularly in the Indonesian operations.

Tax-holiday Period Boosted 3Q18 Felt Sales

Due to a surge in automotive sales during the zero-rated GST period, the insulation segment’s revenue jumped to RM8.6m (+19% qoq, +16% yoy). This was also driven by better sales in the Indonesian market (+21% qoq, +14% yoy) and domestic felt sales in the local air-conditioning market. However, lower sales and profits in the hygiene division, which was affected by higher production expenses, dampened 3Q18 earnings (-26% yoy), which caused 9M18 earnings to come in below estimates.

Maintain BUY With a Lower TP of RM0.68

We cut our 2018-19E EPS by 9.7-5.3% in view of the earnings miss. We believe that margins for the hygiene segment should recover moving forward (revenue and PBT improved qoq), while the earnings momentum in the insulation segment should continue due to better utilisation rates. Despite the cut in our forecasts, we maintain our BUY call on Oceancash with a lower TP of RM0.68 based on a 14x FY19E PER (previously 15x), at +1SD above the 5-year mean. Key downside risks: fiercer competition in the hygiene division and weak felt sales.

Source: Affin Hwang Research - 3 Dec 2018