Result

• Wellcall Holdings Berhad (Wellcall) posted a net profit of RM7.9m during 2QFY22, which rose 14.2% qoq but depleted 9.8% yoy. Meanwhile, revenue soared 8.3% qoq and 12.4% yoy.

• Below estimates. The Group’s 6MFY22 net profit of RM14.9m was below our in-house and market expectation, only accounting for 44.6% and 42.1% of full year earnings forecast respectively. The lower-than-expected earnings were dented higher freight cost as well as higher production cost which eroded the Group’s profit margin.

• Dividend declared. Wellcall has declared a second single-tier dividend of 1.4sen/share which brings total dividend payment of 2.8sen/share as year to date. This makes up 52.1% from our dividend payout assumption for FY22.

Comment

• QoQ earnings supported by overall increase in orders from export and local markets. Wellcall’s revenue and Profit before Tax (PBT) improved by 8.3% qoq and 12.4% qoq respectively during 2QFY22. This was mainly due to increasing momentum of global demands for industrial rubber hoses. On the same note, PBT margin increased by 3.3ppts qoq to RM 11.3m. Overall sales to local and export markets increased – Local Market (+3.4%), Middle East (+79.4%), Europe (+12.6%), Australia/New Zealand (+11.7%), South America (+44.2%), Africa (+195.7%) whilst USA/Canada (-11.7%) and Asia (-0.4%) trended lower.

• YoY revenue underpinned by robust demand from USA/ Canada market, but margin compression continues. YoY, revenue improved 12.4% thanks to surged in order by customers from USA/Canada (export revenue +24.2% yoy). Besides, the Group also pointed out that the increase in revenue was corresponding to its efforts in fulfilling customers’ requirements especially through prompt deliveries. Despite encouraging revenue during the period, PBT margin down by 4.9ppts no thanks to higher logistic costs arising from constraint in shipping schedules, which led to higher freight charges.

• Softer 1HFY2022 due to higher freight cost. Cumulatively, revenue increased 12% yoy. The overall improvement in revenue was mainly due to increase of demand from both local and export markets in line with the gradual improvement of global economy sentiment and trade momentum of the industrial hose market. Export sales in 1HFY22 registered an increase of 11% while local market registered an increase of 24% as compared to 1HFY21. Despite higher revenue recorded, PBT margin was again hurt by an overall surge in freight charges and we see this issue to persist at least until end 2HCY2022.

• Hoping for better FY22. Looking forward, the Group remains optimistic on its business prospects for FY22 banking on: (i) encouraging demand from their customers thus translating into healthier orderbook, and (ii) benefiting from its diversified customers base, globally and locally. With borders reopening since 1st April 2022, we see the Group labour shortage issue will be alleviated (current composition of foreign and local labour: 50%-50%). Still, we see the disruption in supply chain as the biggest threat to the Group as delay delivery and frequent rescheduling were required and by worst surge in freight cost. The Group remains upbeat to sustain its market share amid challenging environment arising from the long persisting supply chain issue. The Management guided that repricing activities was performed on every 2-3 months basis with combination of absorbing and passing on the additional cost to customers. 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 stronger growth in the APAC region and various new products development.

Earnings Outlook/Revision

• We tweak down FY22F and FY23F earnings forecasts by 11.4% and 11.5% respectively to RM29.6m and RM34.5m on the back of lower sales assumption as well as weaker margin.

Valuation/Recommendation

• Maintain BUY call on Wellcall with an unchanged target price of RM1.50 as we ascribe higher PE multiple on Wellcall given its positon as the largest rubber hose manufacturer in the country and well diversified customer base. Our valuation is now pegged at PE of 21.7x FY23F EPS of 6.9sen, which is higher 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 - 30 May 2022