We visited Wellcall Holdings Berhad (Wellcall) plants at Pusing, Perak, recently and came back feeling upbeat on the group’s prospect amid encouraging demand from exports sales stemming from steady replacement market for rubber hose usage. On top of that, the group is prudently overseeing its operating expenses in order to safeguard 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 visit:
Steady industrial rubber hose demand. We understand that the production of industrial rubber hoses is currently operating at a satisfactory level, with both Plant 1 and Plant 2 running at maximum capacity, and Plant 3 operating at 80% utilization rate on a single shift basis across all plants. Plant 3, which focuses on the production of Mandrel and Spiral, is equipped with technologically advanced production lines and machinery that enhance production quality and efficiency. Most of the production is catered for the oil and gas (O&G) industry, with approximately 50-60% of the revenue being contributed by both upstream and midstream segments. It is worth noting that bulk of the orders come from the replacement market, as rubber hoses have a limited lifespan of between 3 to 12 months due to industry regulations and durability requirements.
Effective cost containment measures. Wellcall is watching closely the trend of raw materials prices (i.e., synthetic, and natural rubber) to ensure cost efficiency. The Group will stock up their inventory levels for three to six months during price dips, and up to three months when prices increase. This strategy ensures cost-effectiveness in managing operating expenses and protects margins. Recall that in the previous analyst briefing the management was optimist that it can maintain average selling prices (ASPs) after two rounds of price hikes in 2Q-3QFY22. Note that the Group is maintaining price competitiveness in order to preserve market share wherein pushing another round of price hike will only lead to smaller orders from customers. Nevertheless, a revision in ASPs will take place only if there is a substantial jump in raw material prices.
Our View. We are optimistic on Wellcall prospect given its steady 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. Our FY23F-FY25F earnings forecast remain intact at this juncture. 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 favourable view on Wellcal is driven by its healthy margin, attractive cash position and dividend yield.
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