Earnings Recovery on Track

Oceancash’s 9M19 results came in within both our and the market’s expectations. 3Q19 pre-tax profit increased 10% qoq to RM2.9m mainly on the back of higher automotive felt sales in Indonesia. We expect another decent quarterly performance in 4Q19, leading to a 20% core earnings recovery for the full year. We make no changes to our earnings estimates and maintain our BUY recommendation, with an unchanged TP of RM0.61.

Within Expectations

9M19 core net profit declined 11.3% yoy to RM5.7m, mainly due to a higher effective tax rate (lower utilisation of tax recoverables) as core pretax profit was flattish at RM7.2m (+1.2% yoy). The top line increased by 2.8% yoy as sales from its insulation division continued to grow (+5.8% yoy), while its hygiene division sales also edged up (+1.1% yoy) as the loss in orders from its Thailand clientele were made up for by higher domestic sales as well as exports to other foreign markets. All in, 9M19 results accounted for 72% and 71% of market and our full-year estimates. A DPS of 1.0sen was announced during the quarter (3Q18: 1.0sen).

Sequentially Flat

Notwithstanding a deferred tax asset reversal of RM0.2m, core pre-tax profit increased 10% qoq to RM2.9m due to stronger insulation sales (+7.9% qoq) – mainly from higher automotive felt sales at its Indonesian operations. On the other hand, hygiene segment sales dropped 6.2% qoq, although this came off an especially strong 2Q19 (particularly export sales to Japan). Heading into the last quarter, we expect Oceancash’s sales traction for both its business segments to sustain and consequently post a robust yoy earnings recovery from 4Q18’s disappointing performance.

Maintain BUY

We make no changes to our earnings estimates as the results were largely in-line. Maintain BUY with an unchanged TP of RM0.61 based on 14x 2020E PER target. We continue to favour Oceancash for its hygiene segment’s growth prospects, while expecting steady demand for felts from the automotive industry to anchor its insulation segment’s performance. Key downside risks include: (i) fiercer competition in the hygiene division; (ii) unfavourable forex fluctuations; and (iii) weaker regional felt sales.

Source: Affin Hwang Research - 28 Nov 2019