Result

• Wellcall Holdings Berhad (Wellcall) posted a net profit of RM10.8m during 3QFY22, which rose 35.9% qoq and 52.0% yoy. Meanwhile, revenue soared 9.7% qoq and 31.8% yoy to RM47.1m.

• Above estimates. The Group’s 9MFY22 net profit of RM25.7m was above our in-house and market expectation, accounting for 86.8% and 78.4% of full year earnings forecast respectively. The higher-than-expected earnings were resulted from increase of demand volume from both local and export market.

• Sales for local market and export market were 9.3% and 90.7% respectively. Overall sales to local and export market inched up on qoq basis. Sales to local market rose by 9.1% qoq whilst sales to export markets surged by 9.8% qoq – USA/Canada (+8.8%), Asia (+29.1%), Middle East (-4.4%), Europe (+5.7%), Australia/New Zealand (-16.7%), South America (-13%) and Africa (+261.3%).

• Higher demand volume coupled with effective cost pass through supported its bottom line growth. Net profit grew by 52% yoy as continuation of increasing momentum of global demands for industrial rubber hoses led to higher demand volume. Besides, the Group has successfully passed on some surge in cost to its customers with slight increase in pricing for certain products.

• Dividend declared. Wellcall has declared a third singletier dividend of 1.6sen/share which brings total dividend payment of 4.4sen/share as year to date. This makes up 77.7% from our dividend payout assumption for FY22.

Comment

• Cost pressure persists. Gross profit margin drop 1.7ppts qoq mainly due to soaring raw material prices and freight cost. One of the raw materials involved in producing its composite hose is steel. While we continue to see steel prices to inch up, we expect Wellcall would be able to pass on this cost to its customers constantly (repricing on every 2-3 months basis) and effectively. The Management also guided that they will look for suitable replacement materials to substitute some of the raw material with sky-rocketed prices.

• Expect to end FY22 in grace. 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. The Group remains upbeat to  sustain its market share amid challenging environment  arising from the long persisting supply chain issue.  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.

• Downside risks to our stand. The Group has been hindered by soaring freight charges for long. We see the high freight cost issue slowly fading away as tightening of monetary policy globally will likely to result in weakening demand of shipping containers and chance for supply to catch up demand, hopefully. Nevertheless, we also expect a slump in oil prices as aggressive interest rate hikes in the US might weaken the global economy and fuel demand. This is expected to impact the Group as around 50% of its revenues are derived from the oil & gas sector.

Earnings Outlook/Revision

• We raise FY22F and FY23F earnings forecasts by 16.6% and 5.5% respectively to RM34.5m and RM36.4m on the back of expected higher demand volume as a result of gradual improvement of trade momentum of the industrial rubber hose market.

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 - 23 Aug 2022