Result

• Wellcall Holdings Berhad (Wellcall) posted a net profit of RM7.1m during 3QFY21, which was down 19.4% qoq but jumped 81.4% yoy. Besides, revenue depleted 6.4% qoq but soared 35.9% yoy.

• As for 9MFY21, net profit of RM24.1m was up 18.4% yoy on the back of strong revenue which escalated 12.2% yoy. The strong growth was spurred by strong sales from exports market despite subdued contribution from local market due to recommencement of lockdown.

• Below expectations. The Group’s 9MFY21 net profit of RM24.1m was below our in-house (60.6%) and market estimates (68.1%). The lower-than-expected results was due to subdued sales from local market due to imposition of lockdown arising from higher number of Covid-19 cases which led to restricted business operation.

• Third interim dividend declared. Wellcall has declared a third single-tier dividend of 1.40sen/share. This brings total dividend payout of 4.2sen/share for FY21 which makes up 65.7% of our full year dividend forecast.

Comment

• Enforcement of lockdown weighed down QoQ results. Wellcall’s revenue and PBT deteriorated 6.4% qoq and 20.7% qoq respectively due to continued lockdown which affected the business operations. In conjunction to that, local sales was subdued, which slid 8.1% qoq. On the same note, sales in Middle East (-46.2% qoq), Australia/New Zealand (-33.6% qoq), South America (- 61.3% qoq) and Africa (-2.5% qoq) also registered unexciting growths. However, sales from USA/Canada, Asia and Europe were higher which grew 2.5% qoq, 25.1% qoq and 48.3% qoq respectively as industrial rubber hose markets of the above nations resumed their growth trajectories, we believe.

• Both export and local sales spurred YoY performance. The Group’s revenue and PBT jumped 35.9% yoy and 57.7% yoy respectively, buoyed by better sales from both markets. Exports sales dominated by USA/Canada (+55.3% yoy), Asia (+66% yoy), Europe (+26.1% yoy), Australia/New Zealand (+20.9% yoy), South America (+23% yoy) and Africa (+20.8% yoy) except for Middle East (-10.6% yoy). Besides, strong sales was recorded for local market which increased 13.2% yoy given lower base in the same quarter last year due to full lockdown. Additionally, PBT margin also improved by 3.7ppts given better cost control, we believe.
   
• Sturdy 9MFY21. For 9MFY21, revenue and PBT increased 12.2% yoy and 19.7% yoy respectively resulting from stronger contributions from both export and local markets. Export sales made up approximately 91.7% total revenue during 9MFY21 as compared to 90.6% in 9MFY20. Also, export sales soared 13.6% yoy despite discouraging local sales which eased 1.5% yoy.
   
• Steady outlook. Looking forward, the Group remains optimistic on its business prospects for the rest of the year given rapid vaccination roll-out coupled with implementation of National Recovery Plan locally which brings meaningful recovery for our economy. The Group will continue to focus on its operational efficiencies on all aspects to ensure the smoothness of business environment. Overall, we believe the Group’s business performance to resume back to the pre-Covid-19 level in the near term, spurred by steady demand of its industrial rubber hose, on top of better contribution from its joint venture with Swedish partner, Trelleborg on manufacturing marketing, and selling of composite hose.

Earnings Outlook/Revision

• We tweak down our FY21F and FY22F earnings forecasts by 20.4% and 15.1% respectively to RM31.7m and RM37.7m on the back of lower sales assumption.

Valuation/Recommendation

• Maintain BUY call on Wellcall with a lower target price of RM1.22 (RM1.33 previously). Our valuation is now pegged at PE of 20x FY22F EPS of 6.1sen (8sen previously), which is close to +2 standard deviation PE of 20.6x.

• We favour the stock for its: 1) strong margins and healthy cash position; 2) hose is widely used in wide range of industries; 3) favourable cost/sales perspective in which costs are mostly denominated in local currency, MYR whilst export proceeds are in USD. Wellcall is a fundamentally strong company which renders golden opportunity for investors to ride on cyclical stock play as the Group is well poised to benefit from economic recovery.

Source: JF Apex Securities Research - 25 Aug 2021