It said on Friday that the finalisation of Proton-Geely partnership in July 2017 was positive as an increase in automotive production at Proton factories could lead to higher felt demand.
The research house maintained an Add for OceanCash, which is Malaysia’s largest felt manufacturer with a 60% share of the local market, with an unchanged sum-of-parts based target price of 88 sen.
CIMB Research said the company’s 1H17 net profit of RM4.5mil in line with expectations, despite only meeting 37% of its and 38% of Bloomberg consensus' full-year estimates, as 2H is seasonally stronger.
The 1H17 revenue grew 11.2% on-year and net profit rose 17.4% on-year to RM4.5mil, thanks to higher sales from as well as better economies of scale.
“We expect Oceancash to record a better performance in 2H17, in tandem with 2H being its seasonally stronger period. With Ramadan falling earlier in 2Q17 (vs. 3Q16), we expect production volume of both felt and hygiene segments to pick up significantly on-quarter as well as on-year.
“We gather that new customers from both segments are finalising orders at this juncture; this should lead to delivery of orders beginning 4Q17,” it said.
CIMB Research expects margins should also improve from higher utilisation rates and better cost efficiencies.
On June 23, Geely agreed to subscribe to a 49.9% stake in Proton, forming a partnership with DRB-Hicom. This is with the aim of utilising Proton production facilities to manufacture cars to be sold in the Asean region.
“We see this as positive in the long term for Oceancash as a ramp-up in local car production should boost felt demand. We gather that Oceancash currently supplies automotive felt to auto part manufacturers, which in turn supply assembled auto parts to various automakers including Proton,” it said.
CIMB Research continues to like Oceancash for its robust earnings growth potential (FY17-19F CAGR of 18.5%) backed by: i) higher felt sales in Indonesia, ii) better economies of scale from felt volume growth, and iii) higher global demand for its non-woven products, especially in China.
The downside risks are a decline in automotive sales in Indonesia and/or Malaysia and sharp strengthening of RM/US$.
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