Oceancash (OCP) reported a good set of results: 1Q20 core net profit of RM1.6m exceeded our expectations. While we had expected a weaker quarter due to the Covid-19 Movement Control Order, better insulation margins were a saving grace to its 1Q20 results. Looking past the weaker 1H20 results, we believe 2H20 results will likely benefit from the resilient orders and stronger ASPs for the hygiene segment as well as better car sales which will lift its insulation orders. We raise our 2020-22E EPS by 6-22%, and raise our TP to RM0.61 (from RM0.56). Upgrade to HOLD (from Sell).

Above Expectations

Despite a 3% yoy decrease in 1Q20 revenue, OCP’s 1Q20 core net profit grew by 22% yoy to RM1.6m, on higher EBITDA margins and a lower effective tax rate. OCP’s 1Q20 EBITDA margin improved by 3.4ppts yoy to 16%, largely on account of better insulation segment margins. We note that the Group had successfully developed/sourced a cheaper alternative material (same functionality), which had yielded better margins for the insulation segment margins - 1Q20 Insulation PBT margin expanded by 10ppts to 24%, its highest levels since 30% in 4Q14. Overall, the results were above our expectation, accounting for 34% of our full-year estimate. The earnings surprise was largely due to higher-than-expected margins.

2020: a Year of Two Halves

Moving ahead, we believe the 2Q20 results could be sequentially weaker, as the insulation segment had suspended operations and the hygiene segment was operating at minimal capacity between April to early-May 2020 to comply with the MCO’s guidelines. Looking past 1H20, OCP’s results should improve, in our view, considering the Group is now busy ramping up production to cope with the backlog of orders. Elsewhere, we confirmed with the management that OCP’s higher-priced non-woven products are still very much used as absorbent layers for diapers and sanitary pads, and not used for surgical face masks.

Upgrade to HOLD With a Higher TP of RM0.61

We raise our 2020-22E EPS by 6-22% to factor higher insulation margins and lower 2020E tax rate assumptions to 19% (from 21%). Post earnings revision, we raise our price target to RM0.61 (from RM.56) based on an unchanged target PER of 22x on 2021E EPS, and upgrade the stock to a HOLD (from Sell). Key upside/downside risks to our call are better/lowerthan-expected traction for hygiene and felt segment and forex fluctuations

Source: Affin Hwang Research - 29 Jun 2020