Oceancash’s 2018 core net profit of RM6.7m (-32% yoy) fell below our and consensus expectations, accounting for 75% and 77% of full-year estimates respectively. Underperformance at the hygiene division dragged on the group’s earnings, despite recording strong improvement from the more profitable insulation division. Nonetheless, we believe earnings would stage a recovery in 2019, lifted by a long-awaited contribution to the hygiene segment expected from a new major customer, in addition to still healthy prospects for its insulation business. We therefore maintain our BUY call, albeit with a reduced TP of RM0.51.

2018 Results Below Expectations

The weak set of results was led by a shaky 4Q18, as revenue fell 12.8% yoy on the back of weaker hygiene sales (-21% yoy) while partially offset by higher insulation sales (+9.0% yoy). Correspondingly, PBT plunged by 81.4% yoy on weaker margins while also exacerbated by provision of doubtful debts and employee benefits of RM0.44m at its Indonesian insulation operations, as well as a deferred tax asset reversal of RM0.57m. On the flipside, we understand that the production efficiency issues related to its hygiene division operations since 2Q18 has been fully resolved in 4Q18, which should ease up margin pressures moving forward.

Hygiene Woes Expected to Subside

We gather that one of the main causes for the hygiene division’s disappointment was due to the loss of orders for a highly-profitable soft goods product in Thailand in 2H18, and therefore led to a 45% sales decline vs. 1H18 from the country. Additionally, hygiene export sales to other key markets such as Japan, China and Korea were also weaker during the year. Still, we expect maiden orders from a new major customer within the hygiene segment to come in starting from 2H19. This, alongside an expected recovery in hygiene operating margins should serve to reverse negative traction seen for the division over the recent quarters.

Maintain BUY With a Lower TP RM0.51

We cut our 2019-20E EPS by -17%/-8% respectively in view of some lingering weakness seen in the hygiene business. We nonetheless believe that the segment should recover over the year, while the insulation segment’s earnings momentum is sustainable in our view. Subsequently, we maintain our BUY call on Oceancash, albeit with a reduced TP of RM0.51 based on an unchanged 14x 2019E PER. Key downside risks: fiercer competition in the hygiene division and weaker felt sales.

Source: Affin Hwang Research - 28 Feb 2019