This article first appeared in The Edge Financial Daily on March 30, 2018
Oceancash Pacific Bhd
(March 29, 48 sen)
Maintain add with a lower target price (TP) of 76 sen: Oceancash Pacific Bhd’s revenue for the financial year ended Dec 31, 2017 (FY17) rose 7.2% year-on-year (y-o-y) to RM89.7 million, driven by higher sales volume from both the felt and hygiene segments. However, FY17 net profit declined 3.2% y-o-y to RM9.8 million. Besides a less profitable product mix and a weaker US dollar against the ringgit, management clarified that the y-o-y decline in net profit was due to expenses of RM200,000 for the transfer of the group’s listing to the Main Market and one-off repair expenses of about RM500,000. If we were to add back these one-off expenses, FY17 core net profit would stand at RM10.5 million, which is a 3.4% y-o-y growth.
Moving forward, Oceancash aims to expand its non-woven (hygiene) presence in Thailand, where the bulk of large-scale diaper factories are located. Initially, Oceancash will set up a warehouse facility there as most Thai customers would require a short delivery time. If demand in Thailand is strong, Oceancash has plans to install two non-woven lines there. Currently, the contribution from non-woven sales in Thailand is minimal and Oceancash believes there is a large potential to capture more Thailand-based customers.
For the felt segment, Oceancash believes the Indonesian market remains competitive in terms of pricing. However, it is currently in talks with new Indonesian customers, including those in the mattress and air-conditioning industries. To be more competitive in Indonesia, Oceancash may lower its selling prices. Still, we view this potential move positively as its felt facility there is underutilised at a 33% utilisation rate. In view of this, Oceancash expects the facility’s utilisation to increase from 33% to between 40% and 50% in FY18.
Nevertheless, we lower our FY18 to FY20 earnings per share (EPS) estimate by 6.7% to 13.8% to account for lower selling prices in the felt segment and lower US dollar-to-ringgit assumptions. Based on our estimates, we believe Oceancash is likely to record 16.9% y-o-y growth in FY18 net profit, mainly driven by higher orders from both its felt and hygiene segments.
After inputting our EPS cuts, our sum-of parts-based TP is lowered to 76 sen. However, we retain our “add” call as we continue to like the stock given its strong growth prospects. Although its FY17 results were weaker than expected, we expect Oceancash to record a stronger FY18 from higher demand for its non-woven products in Thailand, growing demand for felts in Indonesia, and higher economies of scale on both felt and non-woven volume growth.
Potential rerating catalysts include higher-than-expected demand for its felt in Indonesia and hygiene products in Thailand, and large contract awards from new customers in Indonesia. Downside risks are a decline in automotive sales in Indonesia and/or Malaysia, and sharp strengthening of the ringgit against the US dollar. — CGSCIMB Research, March 28