Oceancash’s 6M19 results were deemed in line with our expectations but above the street’s. 2Q19 core net profit recovered 61% qoq due to higher sales from both its insulation and hygiene segments, as well as lower production costs. We expect a stronger performance in 2H19, driven by higher volume orders for its hygiene business. Reiterate BUY, albeit with a lower revised TP of RM0.61.

Within Expectations; 1H19 Operating Profit Up 2.8% Yoy

6M19 core net profit declined 15.4% yoy to RM3.5m, largely due to higher effective tax rates (caused by lower tax recoverable). Recovery in earnings continued to be reflected by 1H19 core EBIT, which rose 2.8% yoy. 1H19 revenue increased 4.3% yoy, led by higher sales contribution from both its hygiene (+3.0% yoy) and insulation (+6.3% yoy) businesses. The 1H19 results which outperformed market expectations, were within ours although it accounted for 42% of our full-year estimates. For 2H19, we foresee more upbeat results driven by increasing hygiene products orders from both existing as well as newly-secured clientele.

Sequential Profits Driven by Stronger Volume Growth

On a sequential basis, core earnings improved strongly by 61.5% qoq, due to: (i) robust hygiene sales growth (+12.1% qoq), of which was partially driven by contribution from a new foreign client on top of increased recurring orders; (ii) cessation of adverse forex movements which impacted raw material costs as well as foreign sales; and (iii) higher insulation segment sales (+3% qoq) driven by the automotive industry.

Overhang of Key Client Qualification Resolved

We remain positive on Oceancash’s earnings outlook, while noting that the group has received its maiden orders for hygiene products from a key multinational player, after going through a protracted qualification period. Meanwhile, we also expect some tax allowances and utility cost-savings to kick-in from 4Q19 (due to its investment in solar panels).

Maintain BUY, Price Target Revised to RM0.61 (at 14x P/E Target)

We trim 2019-21E earnings by -3.5% solely to reflect a higher effective tax rate going forward, while leaving other estimates intact. We continue to favour Oceancash for its hygiene segment’s strong growth prospects, while expecting steady demand from the automotive industry to underpin its insulation segment’s performance. Maintain BUY, with a slightly lower TP of RM0.61 (from RM0.63) based on an unchanged 14x 2020E PER target. Key downside risks: (i) fiercer competition in the hygiene division; (ii) unfavourable forex fluctuations; and (iii) weaker regional felt sales.

Source: Affin Hwang Research - 26 Aug 2019