Results

• Remarkable result - In its 3QFY23, Wellcall achieved revenue of RM56.2 million, reflecting a 12.0% qoq increase and a noteworthy 19.1% yoy growth. Similarly, the Group’s net earnings of RM17.8 million experienced a substantial boost, rising by 38.6% QoQ and an impressive 64.8% YoY.

• Above expectations - Wellcall's revenue for 9M23 has exceeded both our and the street's expectations, accounting for 89.7% and 85% of our/consensus’ full year forecast. Furthermore, the Group’s bottom line has also surpassed our full-year estimates, reaching 107.8% of our FY23 forecast and a 101.3% of the full-year street estimates.

• Impressive QoQ Performance - In 3QFY23, Wellcall’s revenue of RM56.2 million grew 12.0% qoq due to the growing global demand for industrial rubber hoses. Consequently, this led to a PBT of RM22.6 million, reflecting a robust 33.3% QoQ increase compared to RM16.9 million in 2QFY23.

• Strong YoY growth driven by global demand - Wellcall has delivered robust results as global demand strengthens. For 9MFY23, the Group recorded revenue of RM158.9 million, marking an impressive 22.5% YoY increase or a significant rise of RM29.1 million. This notable upturn in revenue was primarily attributable to the surge in revenue from the export market, which grew by 25.0% yoy to reach RM147.2 million. This substantial increase offset the decline in revenue from the local market, which dropped by 5% yoy to RM11.7 million. These results were driven by the continuous orders stemming from the market's demand for industrial rubber hoses.

• In 9MFY23, the group did not require any borrowings. This signifies that Wellcall possesses substantial capacity for additional expansion, if needed.

• Wellcall’s cash balance stood at RM53.6, representing an increase of 6.0% from the financial year end of 2022.

• Management has announced a dividend for the current quarter, with Wellcall revealing a third single-tier dividend of 2.2 sen per share. This brings the total dividends for the 9MFY23 to 5.4 sen per share, equivalent to RM26.9 million. The total dividend payout for the nine-month period aligns with our projected DPS of 6.1 sen, resulting in a yield of 4.9%.

Comments

• The management expresses confidence in the Group's ability to stay robust and maintain its market share and position, even in the face of forthcoming challenges within the global economy. The management affirms its commitment to implementing all essential precautions and adopting a practical approach in its strategic and operational planning. These measures aim to fortify the current business and enhance operational efficiency.

• Going forward, the management remains optimistic about the strong demand for low- and medium-pressure industrial rubber hoses, which not only enables the Group to maintain its market position but also expand its market base. Unless unforeseen circumstances arise and considering the overall health of the global economy, the management maintains a positive outlook for the performance in FY2023. This outlook is based on the expectation of a continued gradual increase in global demand for industrial rubber hoses.

• We hold a positive view on Wellcall for FY23, as evidenced by its quarterly performance.

Earnings Outlook / Revision

• Considering Wellcall's impressive performance, we are revising our net earnings projections upwards to RM46.3 million (+29.3%) for FY23f and RM50.3 million (+30.6%) for FY24f. Additionally, we are also upgrading our revenue estimates to RM199.8 million for FY23f and RM214.7 million for FY24f from RM177.1 million and RM189.0 million, respectively. These revisions are primarily driven by the sustained strong demand and continuous orders in the market for industrial rubber hoses. The substantial increase in our FY23f and FY24f bottomline estimates is attributed to the assumption of lower selling and distribution costs for the Group.

Valuation and Recommendation

• Maintained a BUY call for Wellcall Holdings Berhad, with a higher target price of RM1.58. The new target price is 19.7% higher than the previous target price of RM1.32, following our earnings upgrade.

• Our target price indicates a potential upside of 25.6% from the current price of RM1.26.

• Our valuation is now pegged at 17.0x PE multiple with FY23F EPS of 9.3 sen. The ascribed PE multiple is higher than its mean PE of 16.5x but lower than its 1Y +1.5 Std Dev PE multiple.

• Considering the ascribed PE multiple, we believe it is justified by Wellcall’s ability to maintain its market share in the rubber hose industry, improved business efficiency, the continuation of a gradual increase in the momentum of global demand for industrial rubber hoses, and its ability to cater to a global customer base.

• Risks: i) Fluctuation in raw material cost, ii) Supply chain disruption, iii) Foreign Exchange rate risk

Source: JF Apex Securities Research - 22 Aug 2023