• Post Wellcall Holdings Berhad (Wellcall) analyst briefing, we are optimistic on Wellcall business outlook amid encouraging  demand from exports sales stemming from steady replacement  market as rubber hose usage only lasts for 3-12 months. Margin  wise, the Group is cautiously monitoring its operating cost  through good cost containment strategy to preserve profitability.

• Maintain a BUY call on Wellcall with unchanged TP of RM1.41. Our  valuation is based on average 3-year high PER of 19x that is  pegged to FY24F EPS of 7.4sen. Key takeaways from the analyst briefing:

• Backlog orders at cozy level. 1Q23 revenue of RM52.5mn included  backlog orders of c.RM3-4mn from previous orders (quarter ending  September 2022) due to logistic and freight arrangement by  customers to reduce freight cost despite normalization in freight  charges. As for 2Q23, the spillover orders from January to February can be expected after some logistic slowdown during festive season.  All in all, the Group foresee its backlog order to normalize from 3Q23 onwards. There are still possibilities of backlog order however  due to customer request albeit at manageable level at the Group  level.

• ASPs to remain at this juncture. The management is optimist it can  maintain average selling prices (ASPs) after two rounds of price hike  in 2Q-3QFY22. The Group is maintaining price competitiveness in  order to preserve its market share wherein pushing another round  of price hike will only lead to small orders from customers. Nevertheless, a revision in ASPs will take place only if there is a  substantial jump in raw material prices (i.e., synthetic and natural  rubber) in order to preserve profit margin. Note that Wellcall is  practicing hedging policy on its business strategy.

• New batch of foreign workers pushed production. Full utilization  rate for Spiral and Mandrel hoses while Mandrel hose at  comfortable rate, ranging 80-90% of production capacity based on  1-1.5 shift. This encouraging development was powered by new  batches of foreign workers which came in recently in February. Note  that Wellcall have 380 headcounts of foreign workers currently. No  new batches of foreign workers are expected at this juncture as the  company is looking to improve its automation rate.

• Our View. We are optimistic on Wellcall outlook given its  comfortable market share in the industrial rubber hose industry. We  expect exports sales to remain intact in view of strong products  demand in global market. Also, the easing of raw material price  (natural rubber price) and freight cost due to improving port  congestion will lead to better-than-expected margin. On top of that,  the Group’s orderbook visibility is healthy with rising order volume following recovery in global demand for industrial hoses, a boon to overall  performance.

• Our call. No change to our FY23F-FY25F earnings forecast. Maintain a BUY call on Wellcall with an unchanged TP of RM1.41. Our valuation is based on average 3-year high PER of 19x that is pegged to FY24F EPS of 7.4sen. Our favorable view on the stock is driven by healthy margin, attractive cash position and dividend yield.

Source: BIMB Securities Research - 1 Mar 2023