Wellcall Holdings Bhd (Wellcall) is the largest manufacturer of low and medium pressure industrial hoses in Malaysia with over 20 years of technical expertise. Wellcall has strong orderbook visibility from replacement orders and high customer retention rate. Backed by expected CAGR of 9.9% from year 2020 to 2025 in industrial hose market (source: MarketsandMarkets), we forecast Wellcall to register net profit of RM34.3M and RM39.9m for FY22 and FY23 respectively. BUY with a target price of RM1.46 based on 18x PER FY23f as per Bursa Industrial Index PE.

Wellcall serve over 200 customers across industries like air, water, automotive, fuel & oil, F&B grade and chemical, and export to over 70 countries mainly US, Canada, Asia, Europe, Australia and New Zealand. Its export sales contributed 90% of total revenue. Management guided demand has been growing strong especially from the US and Asian markets. We estimated revenue CAGR growth of 13% from year 2022 to 2024 amid the picking up in business activities as the economy is marching towards recovery.

Wellcall entered into a JV with Trelleborg Holding AB in 2019 to manufacture and sell composite hose and fittings. Utilising the existing plant in Ipoh, Perak commissioned in June 2021 with 2 production lines. Other than supplying to its 49% owned Trelleborg JV, it also focuses on local distributors within Asia. With the technical know-how transferred from Trelleborg, it is able to achieve higher EBITDA margins compare with global hose players such as Sumperflex and Gates Corporation. The payback period on this RM9m venture is approximately 5 years, therefore we do not input significant contribution to its bottomline in the next 3 years.

In addressing the foreign labour issue, Wellcall has been sourcing labour locally of late. The Company has continuously upgraded its production line to higher automation technology to reduce the reliance on labour. While raw material price has been going up, management indicated that there is no hedging in place, however there is a cost pass through mechanism to maintain margins.

The company has a healthy balance sheet with net cash of RM61.6m as at 30 September 2021. It had 102% dividend payout in FY21, higher than its 50% dividend payout policy. Assuming 80% dividend payout in FY22, it will translate into an attractive yield of 4.2%. Our buy recommendation is premised on: (i) visibly earnings growth; (ii) attractive dividend yield; and (iii) its net cash position.

Source: Rakuten Research - 23 Feb 2022