Result

• Wellcall Holdings Berhad (Wellcall) posted a net profit of RM6.9m during 1QFY22, which depleted 30.9% qoq and 15.6% yoy. Meanwhile, revenue was down 16.5% qoq but soared 11.7% yoy.

• Below estimates. The Group’s 3MFY22 net profit of RM6.9m was below our in-house and market expectation, only accounting for 18.8% and 18.3% of full year earnings forecast respectively. The lower-than-expected earnings was dented higher freight cost as well as higher production cost which eroded the Group’s profit margin.

• Dividend declared. Wellcall has declared a first singletier dividend of 1.4sen/share which makes up 26.1% from our total dividend forecast for FY22.

Comment

• Delay in deliveries weighed down QoQ earnings resulted from higher freight charges. Wellcall’s revenue and PBT deteriorated 16.5% qoq and 34.4% qoq respectively during 1QFY22. Revenue tumbled as customers requested for rescheduling their deliveries due to higher freight costs. Additionally, PBT margin also fell by 6.3ppts qoq resulted from lower revenue. In conjunction to that, sales to export markets also declined - Asia (-23.1% qoq), Middle East (-57.7% qoq), Europe (-10.2% qoq), Australia/New Zealand (-2.4% qoq), South America (- 41.7% qoq) and Africa (-81.8% qoq). Nevertheless, exports to USA/Canada picked up slightly (+1.2% qoq) whilst local market sales also trended higher by 23.4% qoq.

• Stellar YoY revenue growth buoyed by sturdy demand from USA/Canada market despite disappointing margin. Wellcall’s revenue improved 11.7% yoy, thanks to prompt deliveries and sturdy demand from USA/Canada market as sales soared by 72.6% yoy. Additionally, sales during this quarter also were spurred by Australia/New Zealand (+21.6% yoy) and South America (+2% yoy). Nevertheless, PBT margin was down by 7.5ppts yoy in view of global surge in freight cost as well as higher production cost due to constraint in shipping schedules and increase in raw material outputs.

• Hoping for better FY22. Looking forward, the Group remains optimistic on its business prospects for FY22 banking on encouraging demand from their customers, benefiting from its diversified customers base, globally and locally, despite the recent high in Covid-19 cases due to spread of Omicron variant which might impact global economic recovery, volatility in supply and demand of raw materials mechanism as well as surge in freight costs. The Group remains upbeat to sustain its market share amid challenging environment arising from fluctuation of supply chain, especially high freight and raw material costs. We foresee the Group to pass additional costs to their customers through price hike in order to maintain the profit margin. Overall, we believe the Group’s business performance to remain upbeat during FY22, 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 FY22F and FY23F earnings forecasts by 9% and 5.6% respectively to RM33.4m and RM39m on the back of lower sales assumption as well as weaker margin.

Valuation/Recommendation

• Maintain BUY call on Wellcall with a higher target price of RM1.50 (RM1.20 previously) as we assign higher PE multiple on Wellcall given its positon as the largest rubber hose manufacturer in the country and well diversified customers base. Our valuation is now pegged at PE of 19.2x FY23F EPS of 7.8sen, which is lower than +2 standard deviation of its 5- year PE of 20.1x.

• We favour the stock for its: 1) Decent 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 value play as the Group is well poised to benefit from economic recovery.

Source: JF Apex Securities Research - 22 Feb 2022