Investment Highlights

• We initiate coverage on Wellcall Holdings Bhd (Wellcall) with a BUY call and a target price of RM1.21. We reckon that Wellcall is a fundamentally sound company which renders golden opportunity for investors to ride on cyclical stock play as the Group is well poised to benefit from economic recovery upon successful launch of vaccine on Covid-19 and reopening of business activities. In fact, the Group’s operations are back to pre-Covid levels. Production lines were reopened in May with more than 90% utilisation rate currently.

• Sheltering from economic headwinds premised on well diversified customer base across different industries. Wellcall is less prone to economic downturn given its fairly diversified customer base and steady demand from various industries. As such, its hoses demand will not be heavily affected by any doldrums in single business segment. Although the Group’s topline and bottomline were slightly affected by the Covid- 19 pandemic, we could see Wellcall to post V shape earnings recovery and normalise back to pre Covid-19 level in FY21. Moreover, Wellcall manages to retain strong relationship with some of its existing customers for more than 20 years.

• Consistently delivering high profit margins. We favour the stock given its robust fundamentals and effective management. The Group has delivered double-digit net profit margins in the past few years ranging from 18.5% to 26.1% since FY15. This is hardly come by for any business which involves in manufacturing of industrial products. This is mainly underpinned by: 1) favourable cost/sales perspective in which costs are mostly denominated in local currency, MYR whilst export proceeds are in USD; 2) orders are mostly on customisation to suit customer needs; 3) effective cost management and productivity, i.e. lower procurement costs as well as maximisation of raw material usage as to reduce wastage and scrap in production process.
   
• Attractive dividend and strong cash position. Wellcall offers decent dividend yield of over 5% for FY21F-22F to reward its shareholders. This is deemed attractive amid current low interest rate atmosphere. In fact, the Group has a dividend payout policy of at least 50% but historically, the Group has rewarded its shareholders by paying more than its minimum payout, ranging from 73.9% to 97.5% since FY15 to FY19. Besides, Wellcall boasts a net cash position of RM15m with zero borrowings.
   
• Exploring different product range to boost sales further. Wellcall entered into a JV with a Swedish company, lifting the Group’s prospects of offering different types of hoses (composite hose) which are more light, flexible and easy to use. We deem this as a long-term growth story for the Group. The JV is expected to incur some start-up losses in the first two years, before starting to breakeven in the third year onwards, and subsequently benefiting the Group for its bottom line (associate level). However, we are not overly concerned on the initial stage of the JV operation as losses are financially insignificant to Wellcall.

Valuation & Recommendation

• We derive a target price of RM1.21 for Wellcall. Our valuation is based on PE of 16.4x (5- year average PE) FY21F EPS of 7.4sen. We believe our valuation is well justified given its strong margins and healthy cash position. The stock’s valuation is now trading below its 5-year historical peak PE of 20.3x. Our fair value on the stock renders 18.6% upside from current closing

Source: JF Apex Securities Research - 27 Oct 2020