Wellcall Holdings Berhad

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD)
Research Report by APEX

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD) Q3 2024...

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD)

A quick recap on Wellcall's 3QFY24 Results!

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD)

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD)
Research by APEX
BUY – TP RM 1.90

"Earnings growth impacted by weaker demand”

• WELLCAL’s 3QFY24 core net profit slipped -23.4% yoy, but rose +15.3% qoq to RM13.6m, bringing 9MFY24 core net profit at RM39.1m (+1.2% yoy) came slightly below expectations, amounting to 69.5% of in-house and 70.2% of consensus expectations.
• Trimmed our earnings forecast by -5.0%/-4.8%/-4.5% to RM53.6m/RM55.6m/RM59.8m for FY24F/FY25F/FY26F respectively, adjusted to the softer demand as well as higher raw material prices.
• Re-iterate our BUY recommendation on WELLCAL with a lower target price of RM1.90, by pegging 17.0x P/E multiple to rolled-over FY25F EPS of 11.2 sen.

Analyst:
Kenneth Leong
kennethleong@apexsecurities.com.my

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD) - Turnaround for Global Demand for Rubber Hoses in Sight, Local Demand remains Strong

Just a few quick notes from the briefing.

1. Orderbook visibility is still good, with order delivery up till September currently.

2. New line is expected to be completed by the end of the year, and this is expected to increase capacity by around 20% and improve efficiency.

3. There has been some rescheduling of shipments by their customers. Nevertheless, shipping is borne by customers and not by Wellcall so this wouldn't impact their expenses.

4. ASP is stable, while volume had increased slightly. That being said, there are some increments in raw mat (NR and NBR) cost. Will Wellcal raise ASP? Depends, the market is competitive and they need to support their customers as well.

5. Trelleborg JV had been fully impaired already since 2022. Will only produce if they receive profitable orders.

6. Exports had declined but offset by increased demand locally. Seeing some big orders from local players. Various industries. Global competition is increasing. Wellcall is still maintaining their competitive strengths. They are seeing global orders picking up again.

7. Sales are about 50% from O&G sector, with the remainder spread across various other industries. Wellcall distributes to over ~200 different customers who are themselves distributors.

8. FCF still strong, and 2 sen dividend declared. Impressively, net cash continues to maintain at a very high level (and even grew) in spite of their high payouts.

9. Succession plans are in place to train the next generation.

10. Are China's hoses substantially cheaper? Not really comparable, as there are various factors that influence the ASP. For example, physical properties, composition, etc. Customers who left wellcall had also eventually came back due to their competitive strengths.

@weiwenn928 yes sir, Harbour's NTA had been climbing from 80sen a share after their bonus issue in 2017 to now at RM 1.95, and their business segments had been growing. Even during the freight downturn where many global players were making losses, Harbour had continued to be profitable in all their main segments. In a typically debt and capex heavy industry, I think what they have done is very commendable. While they generated most of their current cash holdings during the covid years, they had been consistently positive cash flow since way back.

Many are also unawares, it seems, because Harbour's integrated logistics segments also include warehousing (about 900k sqft roughly), 130+ prime movers, and project cargo logistics for specialized cargo.

While not the largest, it is also nothing to scoff at considering how all peers (for land logistics business, and even for marine segment globally) that does this are in very heavy net debt positions.

If you have been following their annual reports (and website), you can see the company has been making good waves, albeit slowly, in improving transparency over the years.

In terms of corporate governance, the next steps to take that could really move their company to the next level, would be implementing a minimum capital requirement policy (rather than a somewhat outdated dividend payout policy) like how the world leaders are doing, and to just give out all excess cash above the minimum required cash holding as dividends to shareholders.

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD) does that, $INNO / 6262 (INNOPRISE PLANTATIONS BERHAD) did that before, Riverstone is doing that too, and many others.

...I should go apply to be part of their corporate strategy department 😂

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD)
Research by Apex
Buy – TP RM2.04

“Positioning for better days ahead"

• 6MFY24 core net profit at RM25.5m deemed within expectations, accounting to 45.7% of our core net profit forecast as we reckon WELLCAL to deliver a seasonally better 2H figures.
• Deferred orders from the Red Sea crisis expected to normalise in coming quarters, while net margins may remain below the 25% threshold for FY24 amid the higher raw material prices.
• Re-iterate our BUY recommendation on WELLCAL with a target price of RM2.04, by pegging 18.0x P/E multiple to FY24F EPS of 11.3 sen.

Analyst:
Kenneth Leong
kennethleong@apexsecurities.com.my

Second Interim Dividend

Quarterly rpt on consolidated results for the financial period ended 31/03/2024

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$KLSE-EPICON $ALPHA / 0303 (ALPHA IVF GROUP BERHAD) $UCHITEC / 7100 (UCHI TECHNOLOGIES BERHAD) $WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD) $HEIM / 3255 (HEINEKEN MALAYSIA BERHAD)

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD) - Short term impact from Red Sea Disruptions; Continues to be a Cash Generating Machine

Wellcall has come a long way since I've been covering them back in 2021. They have continued to perform well and have been giving out lots of dividends to their investors. This low-profile company has RoE of close to 40%, far knocking the ball out of the park compared to many of the other hotly discussed companies. Let's just take a look at some of my brief notes from the latest QR.

Key notes from the latest QR briefing
1. Revenue flattish due to decline in export sales but growth in local sales.
2. Lower raw mat costs + better cost management => Increasing margins
3. Still a money printing machine with strong FCF (which is higher than profits).
4. Expansion of new lines in Plant 3 almost completed, pending some approvals. Target commissioning around Q3 of this year. The new plant has new and modern machines which will improve efficiencies and improve capacity by roughly 20%.
5. Raw Material prices have been rising since end 2023. Wellcall will continue to adjust ASP as necessary.
6. Red Sea disruptions continue to impact them but seeing improvements towards end Feb.
7. Replacement cycle remains strong, with about 90% of orders coming from replacements.
8. Maintenance CAPEX roughly RM 3m a year.
9. Wellcall receives payment upfront before buying raw mat, natural hedging.
10. O&G picking up, seeing new orders and customers in this industry.
11. Any product that can replace rubber hose? So far, none that can.

The recovery of the economies and uptick in industrial production also means more demand for their industrial rubber hoses. I've been following the Red Sea disruptions for a while, and have been paying close watch to companies exporting to Europe and Americas. Things seem to be stabilising, which should bode well for exporters like Wellcall in the coming months (but not necessarily in the upcoming QR!).

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD)
Research by Apex
Buy - TP of RM2.04

"Broadly within expectations"

• 3MFY24 core net profit at RM13.7m came broadly within expectations, accounting to 24.3% of our core net profit forecast.
• Fluctuation in margins due to higher shipping cost and disruption in feedstock supply will be cushioned by gradual rising demand.
• Re-iterate our BUY recommendation on WELLCAL with a higher target price of RM2.04, by pegging 18.0x P/E multiple to FY24F EPS of 11.3 sen.

Analyst(s):
Kenneth Leong
kennethleong@apexsecurities.com.my

WELLCAL - Notice of Book Closure

General Meetings: Outcome of Meeting

First Interim Dividend

Quarterly rpt on consolidated results for the financial period ended 31/12/2023

Annual Report & CG Report - 2023

Circular to Shareholders in relation to the Proposed Renewal of Shareholders' Mandate for Recurrent Related Party Transactions of a Revenue or Trading Nature.

General Meetings: Notice of Meeting

OTHERSWellcall Holdings Berhad ("Wellcall" or "the Company")

Proposed Renewal of Shareholders' Mandate for Recurrent Related Party Transactions of a revenue or trading nature

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD) - A company with high ROC + low growth = Low reinvestment opportunities but high dividend.

Nevertheless, tide seems to have turned in FY23. Can they continue the momentum into FY24?

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD)
Research by Apex
Buy – Target Price RM1.92

“Another commendable quarter”

• 12MFY23 core net profit at RM48.7m came slightly ahead of our expectations, accounting to 104.8% of our core net profit forecast.
• Expansions remain on track with line expansion in Plant 3 is schedule for completion by end-1Q24, while demand is expected to remain fairly solid from oil & gas, automotive and critical industries.
• Re-iterate our BUY recommendation on WELLCAL with a higher target price of RM1.92, by pegging 17.0x P/E multiple to FY24F EPS of 11.3 sen.

Analyst:
Kenneth Leong
kennethleong@apexsecurities.com.my

WELLCAL - Notice of Book Closure

Fourth Interim Dividend

Special Dividend

Quarterly rpt on consolidated results for the financial period ended 30/09/2023

Changes in Director's Interest (Section 219 of CA 2016) - DATUK NG PENG HONG @ NG PENG HAY

@wsk20 petrochemicals? $PCHEM / 5183 (PETRONAS CHEMICALS GROUP BERHAD) comes to mind...
other than that, companies earning in USD and costs in MYR such as $WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD).... and other net exporter companies.

$KAWAN / 7216 (KAWAN FOOD BERHAD) comes to mind as well.

$WELLCAL / 7231 (WELLCALL HOLDINGS BERHAD)

Investor Updates – 3QFY23

Background
1. Specialize in manufacturing low and medium industrial rubber hose.
2. The largest industrial hose manufacturer in Malaysia with more than 20 years of track record.
3. 90% of sales are from over 70 export countries market.
4. Diversify customers base with over 200 customers.
5. 3 factories in Perak and management team is strong in R&D.
6. Industrial rubber hose is applicable in various industries including air, water, automotive, fuel & oil, F&B, and chemical.
7. The main function of industrial rubber hose is to transfer product from one point to another point.

Key Advantages
1. Orders are Customizable – Based on customers’ required specifications such as diameter, colour, etc.
2. Orders are Flexible – Customer can choose whether order low quantity or high quantity orders from the company.
3. Short Delivery – Fast and efficient as they able to handle up to 2 weeks of urgent orders and within 1 to 2 months, Wellcall will able to ship the product to the customers.
4. Zero-inventory Business Model – Does not have any finished product in its factory
5. R&D Product Innovation & Quality – Constantly improve the product range that they offer to their customers.

Key Updates
1. Higher production volume which led to increasing of revenue as this is driven by better production efficiency, better demand and new recruited production workers.
2. Line expansion in Plant 3 which expected to completed by March 2024.
3. Orderbook is healthy with 2 to 3 months’ sales covered.
4. Lower shipping cost has reduced Wellcall selling & distributing expenses.
5. Wellcall is seeing less logistics disruptions compared to pandemic period.
6. In terms of product prices, at 2Q to 3QFY22, there are few rounds of price adjustments to pass on the higher costs.
7. Since the price is stabilizing now, Wellcall is focus on maintaining price competitiveness and volume growth.
8. Industrial rubber hose market still remaining strong.
9. The Trelleborg JV is on the composite hose market which is different from industrial hose market and this market is very competitive. Thus, Wellcall scaled back the production by only produce when they receive the order.
10. Maintain quarterly dividend payment with 2.20sen in this quarter and the ex-date is 13th September 2023.

Business Highlights
1. Wellcall is actively pursuing expansion efforts in both domestic and international markets.
2. As of 9MFY23, approximately 90% of Wellcall's sales come from exports, while the remaining 10% originate from local sales.
3. The United States and Canada stand out as the top contributors to Wellcall's sales, accounting for 30% of the total, and they experienced a remarkable 34% YoY growth in 9MFY23.
4. Asia represents the second most significant market for Wellcall, contributing 20% of its total sales, and it recorded a substantial 35% YoY growth in 9MFY23.
5. In the overall context of 9MFY23, the export market expanded by 25%, while the local market witnessed a slight decline of 5% YoY.

Financials (3QFY23)
1. Wellcall achieved revenue of RM56.2 million, marking a 19% YoY increase and a 12% QoQ growth, primarily driven by heightened demand for industrial rubber hoses.
2. Wellcall's gross profit also showed significant growth, reaching RM23.6 million, with a YoY increase of 36% and a QoQ rise of 16%.
3. PAT (Profit After Tax) for Wellcall increased to RM17.8 million, reflecting a 65% YoY rise and a 39% QoQ increase. This improvement can be attributed to reduced operating costs, including lower raw material and freight expenses, along with the favorable impact of a strong USD.
4. Wellcall maintains a robust balance sheet, boasting a net cash position of RM69.4 million in 9MFY23 and zero debt, enabling consistent quarterly dividend payments.
5. Wellcall generated a solid cash flow of RM35 million, further supporting its dividend distribution.
6. Over the course of 9 months, Wellcall increased its dividend from 4.4 sen in 9MFY22 to 5.4 sen in 9MFY23, surpassing its dividend payout policy of 50%.

Q&A
1. The notable increase in revenue can be attributed primarily to robust demand within the Oil & Gas (O&G) industry, which accounts for 50% to 60% of the total revenue.
2. Wellcall's revenue predominantly arises from replacement demand, comprising approximately 90% to 95% of total sales, while the remainder stems from new customers. Regarding the order book, there isn't much deviation from the typical orders placed by existing customers, except for potential increases in order volume or quantity.
3. Despite the growth in the Electric Vehicle (EV) sector, the automotive market contribution to Wellcall's revenue remains relatively modest.
4. Wellcall occasionally offers minor price discounts to customers when raw material prices are in a downturn. However, this has minimal impact on the company due to its ability to provide prompt deliveries and consistent high-quality products.
5. The expansion of the production line in Plant 3 aims to enhance the company's efficiency, productivity, and output. This advanced line requires minimal labor, typically involving only 1 to 2 workers, and features computerization to reduce manual labor. Consequently, this leads to reduced reject rates and improved hose quality during production.
6. Currently, Wellcall enjoys a 2 to 3 months' visibility into its order book, instilling confidence in the company's future growth prospects within the rubber hose market.