CIMB Research starts coverage of Oceancash Pacific

Car sales will drive demand for Oceancash Pacific's felt products

KUALA LUMPUR: CIMB Equities Research has initiated coverage of Oceancash Pacific, Malaysia’s largest felt manufacturer which has a 60% share of the local market.

The research house said on Tuesday Oceancash mainly produces thermoplastic and resinated felts that are used in the automotive and air-conditioning industries. 

In the non-woven segment, Oceancash’s fabrics are supplied to disposable hygiene product manufacturers. An estimated 80% of its non-woven fabrics are exported to more than 10 countries across the globe.

Initiating coverage of Oceancash with an Add and target price of 88 sen – compared with its  last traded price of 56 sen – CIMB Research said the demand for felt is shifting into high gear through the automotive industry.

Oceancash’s felt division contributes up to 37% and 58% of its revenue and EBITDA, respectively. 

“Moving forward, we project significant volume growth on higher demand, especially from the automotive segment,” it said.

It pointed out Oceancash recently secured more orders from new and existing customers in both Indonesia and Malaysia. This is expected to raise total monthly outputs significantly, albeit on a progressive basis. 

“Higher auto production in Malaysia once Proton secures a foreign partner by mid-2017 is another catalyst.

“Non-woven is a volume game but quality is what will set it apart. Global consumption of non-woven fabrics reached US$37.4bil in 2015 and is projected to post a five-year CAGR of 6.3%,” it said. 

CIMB Research said Oceancash is already seeing higher demand from existing customers as well as new customers, who are switching to its products for better quality.

The acquisition of a spooling machine that rolls longer lengths of non-woven also allows Oceancash to cater to larger-scale manufacturers while increasing cost efficiency. Non-woven made up 63% and 42% of FY16 revenue and EBITDA, respectively.

“We project a three-year (FY17-19F) net profit CAGR of 18.6% driven by: i) higher sales from its Indonesian felt operations due to automotive sales recovery; ii) better economies of scale from higher production volumes from growing felt orders in Malaysia; iii) improved margins as a result of cost savings from its newly-acquired spooling machine; and iv) higher demand for its non-woven fabrics from China and Southeast Asia. 

“We believe that M&As and a transfer to Bursa’s Main Board are other potential catalysts,” it said.

“Our 12-month sum-of-parts sed target price is based on target multiples of 12.9 times CY18 P/E for its felt segment (10% discount to CIMB’s CY18 automotive peer average) and 14.8 times for its non-woven segment (20% discount to CIMB’s industrial sector CY18 multiple P/E). 

“Downside risks to our view: i) decline in Indonesia and Malaysia total industry vehicles numbers; and ii) emergence of new products to replace felts and non-woven fabrics,” it said.

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