We remain positive on a strong recovery in 2019 for Oceancash, supported by an expected rebound from the hygiene segment on the back of improved efficiency and new key clientele in the pipeline, while the insulation segment’s prospects should remain sturdy, underpinned by strong domestic sales and a stable regional automotive market. At 10.5x forward PE, the stock trades at a steep discount to its historical valuation range and peers within the hygiene and autoparts sectors. Maintain BUY with a TP of RM0.51.

Weak Earnings Likely to Have Bottomed Out in 2018…

To recap, Oceancash’s 2018 core earnings tumbled 32% yoy to RM6.7m, 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 2Q18 for a high-value yet highly-profitable product. This was further aggravated by one-off non-cash charges, alongside production issues faced by the hygiene segment from 2Q18 (Fig 5, 2Q18 PBT margin: 3.8% vs 7.6% in 1Q18), which was only resolved in 4Q18 (8.3%, ex-tax asset reversal). The hygiene PBT margin shrunk 6.0ppts yoy to 5.1% in 2018.

… 2019 Looks Set for a Recovery From the Hygiene Segment…

Nevertheless, 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 2H19 and make up for the loss in hygiene sales – raising utilisation rates from ~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% yoy EPS growth.

… While Bolstered by a Steady Insulation Business

The insulation segment fared well in 2018 – sales (Fig 9, +5.2%) and PBT margin (+2.7ppts) expanded yoy – on higher contributions from the local (>50% utilisation rate) and Indonesian automotive markets (~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 TIV growth in 2019.

Update on Expansion Plans Into Thailand

We understand that the group has shifted its focus to setting up operations in Thailand for its insulation business. 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.

Reiterate BUY Rating, Price Target Unchanged at RM0.51

We reiterate our BUY rating on Oceancash with an unchanged TP of RM0.51 based on a PER of 14x 2019E EPS. The stock is currently trading at a discount to its 5-year historical mean forward PER of 12.3x, as well as to its peers within the non-woven hygiene (41% discount) as well as autoparts (26% discount) segments. With its share price hovering at a twoyear 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 RM0.66, offering implied upside of 59%). Key downside risks: 1) lacklustre felt sales due to weaker automotive demand; and 2) loss of orders in the hygiene segment.

Source: Affin Hwang Research - 5 Mar 2019