Oceancash’s 1Q19 results came in below both our and the street’s expectations. While we had expected a weaker quarter reflecting the absence of lucrative product sales from 2Q18, margins were further softened by adverse foreign-exchange movements during the quarter. Notwithstanding that, we continue to see a better performance for the remainder of 2019, driven by new customer sales for the hygiene segment. Maintain BUY with a higher RM0.63 target price.

Below Expectations

1Q19’s weaker core net profit of RM1.3m (-46% yoy) was attributable to lower sales (-4.7% yoy), particularly from the hygiene segment (-6.4% yoy) which saw the reduction of a high-margin Thailand product order from 2Q18. This consequently compressed the group’s margins during the quarter, which were further exacerbated by forex movements whereby USD-denominated key raw materials were purchased in 4Q18 while sales were recognised amid the Ringgit’s strengthening in 1Q19. Overall, the results accounted for 15% of both our and consensus’ previous full-year estimates.

Sequentially Stronger

On a sequential basis, core earnings recovered strongly (from RM0.3m) as sales increased by 6.7% qoq, while the EBIT margin improved 2.1ppts qoq. This was mainly driven by: (i) higher hygiene sales (+10% qoq) whereby the group has received higher recurring orders from its local and Japan-based clientele, and (ii) one-off expenses arising from provision for doubtful debts, employee benefits, and reversal of tax assets amounting to RM1m.

Maintain BUY

We trim our 2019-21E EPS by 5-8% after revising our margin and tax rate assumptions. Despite 1Q19’s hiccup, we expect Oceancash to deliver better earnings in the coming quarters, driven by sales contributions from a new hygiene-segment key customer, which will kick in from 2Q19. Meanwhile, the insulation segment is expected to remain robust, underpinned by the automotive industry’s healthy production activities. We roll forward our valuation base and derive a new TP of RM0.63 (from RM0.51) based on an unchanged 14x 2020E PER. Maintain BUY. Key downside risks: (i) fiercer competition in the hygiene division; (ii) unfavourable forex fluctuations; and (iii) weaker felt sales.

Source: Affin Hwang Research - 31 May 2019