30 JEWELS 2013 Edition
Well-Positioned For Growth
¨ Nation’s largest manufacturer/exporter of industrial rubber hoses
¨ Demand for the Group’s products to remain intact over the next few years, especially from the oil & gas (O&G) sector
¨ Attractive dividend yield of 6%-7% per annum
Wellcall Holdings Bhd is involved in the manufacturing of industrial rubber hoses for customers who are primarily in the business of distributing such products to original equipment manufacturers (OEMs). Wellcall has two product types, mandrel and extrusion, which are sold to six major application markets, namely: i) air and water, ii) welding and gas, iii) oil and fuel, iv) automobile, v) shipbuilding, and vi) food and beverage (F&B). The Group exports more than 90% of its products to markets like Europe, the US, Canada, Australia and New Zealand.
Capacity expansion to boost future earnings. WellCall is expected to soon finalise the land acquisition for a new factory in Lahat, Perak. The Group’s expansion plans will be divided into two phases: i) Phase 1 – increasing overall production capacity by 40% to 46,000 tonnes (33,000 tonnes currently) by June 2014, and ii) Phase 2 – increasing overall production by another 10,000 tonnes, but only after Phase 1 reaches maximum capacity. This new factory will focus solely on manufacturing mandrel type hoses, which make up more than 60% of Wellcall’s revenue and commands higher margins than extrusion hoses, owing to the former’s value-added process. The demand for mandrel hoses remains intact (with industry growth of 4%-5% per annum), especially from markets like Europe and the US, as manufacturers there continue to outsource their requirements.
In addition, given that industrial hoses have a shelf life of five weeks to six months, Wellcall benefits from consistent demand for new hoses to replace ones that have gone past their use-by date. As such, we are positive that the Group will be able to gradually utilise its new production capacity when it comes online, which should boost earnings growth in the foreseeable future. We also see potential costs synergies by locating its plants in close proximity to each other.
Higher margins from the O&G sector. Unlike its rubber glove peers or companies that supply to the mass market, Wellcall is distinct in that its products are tailored for a niche segment. In particular, we are referring to the O&G sector, one of the fastest-growing industries currently. Management has stated that the Group will concentrate on its research and development (R&D) to create high-value products to tap into the opportunities in the O&G and mining sectors. Moving forward, we believe that Wellcall will focus more on expanding and tailoring its products for the O&G segment, as it fetches higher profit margins of ~30%-40%. It will also stand to gain from the replacement market for O&G hoses that have exceeded their use-by date.
Cheaper alternative to rubber sector. As Wellcall has no direct competition in the industry, we are pegging it against the Bursa Malaysia Industrial Index (BBMI), as well as rubber gloves market leader Hartalega (NEUTRAL, HART MK, FV: MYR6.26). The Group is currently trading at an undemanding valuation of less than 11x P/E for CY14, which is almost at a ~33% discount to the BBMI average of 16x and Hartalega’s P/E of 16.3x for CY14. We believe that the discount is unwarranted, given Wellcall’s solid earnings track record and exciting growth prospects.
Company Report Card
Latest results. Wellcall recorded revenue of MYR62.2m (-20% y-o-y) and PBT of MYR13.6m (-9.4% y-o-y) in 1HFY13, owing to lower sales volume and a decline in raw material prices since Oct 2012.
Balance sheet / Cashflow. The Group has a net cash balance of MYR19m as at 2HFY13, which translates into MYR0.14 per share. With its free cashflow of around MYR28m in FY12, we foresee Wellcall’s net cash balance to grow in tandem with its earnings base.
ROE. Wellcall has been delivering strong ROE growth, which improved from 19.38% in 2011 to 28.55% in 2012. Going forward, we expect the Group to continue to deliver double-digit ROEs, as we see its capacity expansion gradually kicking in by FY14-FY15.
Dividend. Over the past three years, Wellcall has maintained a payout ratio of at least 90%, and we expect the Group to pay out a dividend of 17.0 sen for FY13F, which translates into an attractive dividend yield of 7%. Management has indicated that it will maintain a minimum dividend payout policy of 50% moving forward.
Management. Managing Director Mr Huang Sha leads Wellcall’s management team and carries with him more than 30 years of skills and knowledge in all aspects of rubber hose manufacturing.
Our MYR3.08 valuation is pegged to a 14.1x FY14F P/E, which is derived from adding two standard deviations of the Group’s five-year historical trading band, assuming Wellcall’s capacity more than double in the upcoming two years. We also like its attractive dividend yield of 6%-7% per annum. Our target P/E multiple of 14.1x is a 13% discount to the BBMI.