INVESTMENT MERIT

Irresistible dividend yield among small caps players. The company runs on a Just-in-time (JIT) production model which minimizes results in a very lean model, In fact, as at FY12, average trade receivables is stood at 14 days vs its peers of 43- 61 days. Riding on the group’s historically high dividend payout policy (90-100% payout ratio for the last 3 years), we are anticipating a payout of 18 sen and 20 sen NDPS in FY13 and FY14, translates into an attractive net dividend yield of 6.2%-6.9% as opposed to 3.2% average dividend yield in the FBMSC Index.

Beneficiary of a weaker Ringgit against USD and lower raw material prices. Both natural rubber and synthetic rubber makes up c.70% of Wellcall’s raw material cost. Prices of standard Malaysian rubber have fallen off its peak in 2011 to RM7.50/kg now. As 92% of Wellcall’s revenue comes from exports mainly quoted in USD, the recent weakening of MYR against the USD bodes well for its earnings upsides. Ceteris paribus, a 1% depreciation of MYR against USD will lead to an average 1% increase in net profit. Currently, MYR has weakened by 5% against the USD YTD.

Expecting a 3-year NP CARG of 10.4% (to RM24.2m-RM31.4m in FY13-FY15) underpinned by the expansion of mandrel hoses business. Managmenet indicated that its land acquisition for the new factory should be concluded in few months time. Upon expansion, the group’s overall production capacity is projected to increase by 70% (from the current 33,000 tonnes to 56,100 tonnes p.a.) within 3 years time.

Fair value (“FV”) at RM3.00 based on a targeted Fwd PER of 15.3x over FY14 EPS of 19.7 sen. We noted that due to the company’s excellent results in FY12 (+52% YoY), its Fwd PER discount rates to the rubber gloves sector appears to be narrowing significantly since a year ago vs. historical average discount rate of 46%. As such, we pegged our targeted PER to a 3% discount (1-year average discount rate) to the rubber gloves sector average PER of 15.8x. We are positive on the company’s prospect and believe that the company could continue to do well in the export market in the coming years. The yields at current price levels should limit downside risks to share price. However, in view that the valuation of the company offer limited capital upside at this juncture, we suggest investors to keep a watch on the stock for now and probably look to buy on any share price weaknesses.

TECHNICALS

Resistance: RM3.00 (R1), RM3.14 (R2)

Support: RM2.87 (S1), RM2.80 (S2)

Comments: The share price has reached the its previous record high @RM2.92. A meaningful breakout above this level may lead to a new bull-cycle towards RM3.00 and followed by RM3.14 (Fibonacci) soon as the overall uptrend remains intact.

BUSINESS OVERVIEW

Wellcall Holdings Berhad (“Wellcal”) is a global and the largest industrial rubber hose manufacturer in Malaysia. It is an investment holding company, engages in the manufacture, sale, and export of industrial rubber hose and related products. Its products are used in various application markets, such as air and water, welding and gas, oil and fuel, automobile, ship building, and food and beverage markets. The company primarily serves customers who are in the business of distributing rubber hose to original equipment manufacturers and manufacturers. It markets its products in Malaysia, the Middle East, Europe, the United States, Canada, Australia, New Zealand, Asia, Africa, and South America. The company was founded in 1996 and is based in Ipoh, Malaysia.

Source: Kenanga