• Proposed Placement to Fund Expansion of Hygiene Nonwoven Products.
• Ramping up its insulation production to meet the higher demand from a rebound in car sales, we believe.
• Raising our 2021-22E earnings forecasts by 16-21% and raising our TP to RM0.83 (from RM0.61); upgrade OCP to HOLD (from Sell).

Propose Placement of New Shares

OCP has proposed to undertake placement of up to 24.5k new shares, representing up to 10% of its issued shares. For illustrative purposes, assuming the maximum number of placement shares are issued at an issue price of RM0.866/share (10% discount to the 5-day volume weighted average market market), OCP may raise gross proceeds of RM21m, to be partially used to finance its expansion. OCP has earmarked capex of RM40m for the expansion of its hygiene nonwoven products, where c.RM18m is meant for the purchase of 1 spunmelt non-woven machine, and the balance will be used for the acquisition of land and working capital purposes; the shortfall is expected to be funded through internal funds and bank borrowings.

Nonwoven to Broaden Existing Hygiene Offerings and Venture Into PPE

We learnt during the analyst briefing that the new machine is much larger, more efficient and versatile compared to its existing machines, with the capability to produce finer nonwoven materials, which are largely used in the production of premium-range hygiene products (ie, diapers, sanitary napkins, wet wipes) and personal protective equipment (PPE). Although OCP has received numerous inquiries for the PPE segment, we sensed that OCP’s focus is more inclined towards the hygiene segment, which is more lucrative in terms of margins and where demand is more sustainable in the long run. Notably, this new machine will also double its hygiene nonwoven capacity to 16k tonnes/annum. We expect the new nonwoven capacity to be commissioned by 1H22. Recall, the hygiene 2Q20 PBT had increased more than threefold qoq to RM0.9m on higher sales of RM15m (+11% qoq).

Insulation segment to benefit from the cheaper car prices on tax exemption

The insulation segment, however, fell to a LBT of RM0.8m in 2Q20 (1Q20 PBT: RM1.8m) due to a production disruption on lockdowns imposed in Malaysia and Indonesia. Nonetheless, we learnt that OCP is currently ramping up its insulation production to cater for a rebound in car sales. Elsewhere, management guided that the relocation of the insulation machine to Thailand from Indonesia is still delayed due to the travel restrictions. The Group has successfully secured a key pickup customer in Thailand, and should be able to ramp up quickly when the machine is commissioned in 1Q21, we believe.

Upgrade to HOLD With Higher TP of RM0.83

We raise our 2021-2E earnings forecasts by 16-21% to incorporate the higher contribution from the hygiene segment. In tandem, we raise our 12-month price target to RM0.83 (from RM0.61) based on a 2021E PER of 26x (+2SD of 5-year forward mean PER). We have ascribed a higher valuation multiple to reflect the strong earnings expansion we forecast heading in 2022. Upgrade OCP to HOLD (from Sell). At 26x 2021E PER, valuation looks fair. Key risks include: i) higher-/lower-thanexpected growth in the automotive markets in Malaysia, Indonesia and Thailand, and ii) competition in the non-woven segment, especially from Chinese non-woven manufacturers and iii) forex fluctuations.

Source: Affin Hwang Research - 3 Sept 2020