• We favor Wellcall given its leading position in industrial rubber hoses in Malaysia. Its impressive business model and diversified customer base are plus points for the group.

• Wellcall “low volume, high mix” business strategy will be key in maintaining orderbook stability.

• The Group’s earnings are expected to be lifted by solid demand from existing and new customers on the back of respectable cost-containment measures.

• We initiate coverage on Wellcall with a BUY recommendation at a TP of RM1.41, pegged at 19.3x PER on FY23F EPS of 7.3 sen.

Less prone to industry downturn

Wellcall Holdings Berhad (Wellcall) has over 20 years of track record in industrial rubber hoses which boasts with over 200 distributors as their major customers. Demand for Wellcall rubber hoses is expected to remain intact thanks to their diversified customer base and recurring demand from various industries.

Emphasis on sustainable business outlook

The Group is now focus on growth strategy through improvement in operating efficiency and orderbook visibility. The management are optimistic to maintain a full workforce capacity and are looking to hire more foreign workers in order to cater for existing and upcoming demand. Group’s operation zero-inventory business model is likely to keep its cost under control.

New product offering to spur long-term growth

Wellcall joint venture (JV) agreement with a Swedish company, Trelleborg Holding AB (Trelleborg) to manufacture, market, and sell composite hose and fittings is another driver for the group’s long-term growth.

Excellent fundamental track records

Wellcall’s EBITDA margin ranged from 29% to 34% since FY17 to FY21 and this is set to continue in the foreseeable future. The group’s attractive dividend policy which is based on a 50% payout policy presents an attractive dividend value proposition for investors.

Initiate with a BUY call with TP of RM1.41

We initiate coverage on Wellcall with a BUY recommendation at a target price of RM1.41. The valuation is based on the average of 3-yrs high PER of 19.3x pegged to FY23F EPS of 7.3 sen, a value proposition that is reflective of its potential. Conversely, we assign a higher PERmultiple, justified by its bright outlooks particularly its commendable margin growth, healthy cash position, and attractive dividend yield. Our BUY recommendation offers an upside potential of 14.6%.

Bright outlook for the industrial rubber hose industry

Rubber hose is a flexible cylindrical hollow tube, also known as a rubber pipe that is primarily used to carry fluids. Rubber is the preferred choice compared to other materials given the suppleness of the rubber hoses over conservative tubing made of metal or plastics. Among the advantages of using rubber are its flexibility and elasticity, a wide range of applications, great resistance to vibration, and protection from rust. Rubber hoses also have strong adhesion, good abrasion resistance, oil resistance, erosion resistance, ozone resistance, and oxidation resistance compared to conventional metal pipes. The global rubber hose market is further segmented by type, pressure rating, application, end-use industry, and region. Based on type, the market is divided into natural rubber and synthetic rubber. According to pressure rating, it is classified into low, medium, and high. On the basis of application, the rubber hose market is categorized into the home, commercial, industrial, and municipal. By end-use industry, it is segmented into oil & gas, automotive, hydraulic, agriculture, food & beverages, chemicals, infrastructure, and others.

A market research company Dataintelo stated that the Global Rubber Hose Market was valued at US$9.4bn in 2021. In addition, according to MarketsandMarkets, the industrial hose market is expected to grow at a 9.9% CAGR from the year 2020 to 2025 to be driven by a broad-based demand from the oil and gas, construction, manufacturing, agriculture, and automobile sectors. The industry is also expected to gain from the recovery of the oilsector, thanks to solid demand post-COVID-19 crisis. This is expected to be spurred as well by demand from industrial rubber hoses given its ability for higher suction and delivery for both the upstream and downstream products in the industry. This will be further aided by a growing global demand for automobiles given an expected rise in global automobile sales. Note that demand for industrial rubber hoses was intact during the COVID-19 pandemic thanks to pharmaceutical manufacturing facilities which required the application of chemical and gas hoses to produce medical supplies globally. Encouragingly, the Asia Pacific region is expected to contribute the largest share of the industrial hose market with a projected 10.8% CAGR by 2025. This, among others, will be driven by its high population density, growing per capita income, large-scale industrialization and urbanization, focus on the agriculture sector, and an upsurge in industrial development.

A major player in industrial rubber hoses – more room for growth

We initiate coverage on Wellcall with a BUY call. Our assessment reveals that the company is fundamentally sound and will benefit from economic recovery post-crisis - banking on its largest market share in the low-to-medium pressure industry hoses in Malaysia. Wellcall is an original equipment manufacturer (OEM) with over 20 years of track records in the rubber hose industry which is widely used in industries such as mining, oil & gas (O&G), shipyards, automotive, food & beverages (F&B), sea & land transportation as well as industrial & construction works. It boasts with over 200 customers worldwide where it suits the products based on customers’ specifications (e.g., multifarious applications, sizes, pressure, temperature, abrasion assistance).

Source: BIMB Securities Research - 26 Apr 2022