This article first appeared in The Edge Malaysia Weekly on September 28, 2020 - October 4, 2020
PERAK-based Wellcall Holdings Bhd, Malaysia’s largest manufacturer of rubber hoses, has not been spared from the impact of the Covid-19 pandemic but its diversified customer base is helping tide it over the tough times.
“This industry will not be eliminated as it is a necessity for many other industries. Hopefully, we will be back to the pre-Covid-19 path,” its co-founder and managing director Huang Sha tells The Edge in an interview.
He sees persistent market demand for the company’s hoses despite the current weak environment, given that its products are supplied to the air and water, welding and gas, oil and fuel, automotive, shipbuilding, and F&B sectors.
The air and water, welding and gas, and oil and fuel sectors are the major contributors, making up 70% to 80% of its total top line.
“We are very diversified, so we are not so impacted by a single segment,” Sha says when asked whether the company has been affected by the weak oil and gas sector.
For the nine months ended June 30 (9MFY2020), Wellcall’s net profit fell 24.8% to RM20.36 million, from RM27.06 million in the previous corresponding period, due to a decrease in revenue for both the export and local markets as a result of the pandemic and Movement Control Order (MCO).
In FY2019, the company recorded a net profit of RM36.8 million against RM31.6 million the year before.
Overseas sales contributed 91% to the company’s FY2019 revenue, with 120 containers being exported each month. The US/Canada market was the highest contributor, accounting for 30% of its overseas sales.
According to Sha, Wellcall has a customer base of more than 200, with a loyalty rate of over 80%. It has four plants in Perak and employs around 230 people, of which 40% to 50% are foreigners.
General manager Huang Kai Lin, who is Sha’s son, says it is not viable for the company to increase its automation level as there are different product sizes that need to be tailor-made.
“Orders from each customer are not very big, but we can cater for that. They order when they want. This is one of our strengths,” he says.
Net profit margin was quite decent at 22% in FY2019, but it will be lower in FY2020 as the company’s operations have just returned to normal after the movement restrictions were relaxed.
Nonetheless, Kai Lin says Wellcall is targeting double-digit growth in revenue for FY2021. “Our sales orders are still good, as seen in our 3QFY2020 results. The problem is the delay in the delivery of products requested by our customers.”
For 9MFY2020, revenue fell 24.8% to RM20.36 million, from RM27.06 million in the previous corresponding period.
Wellcall signed a joint-venture (JV) agreement with Sweden’s Trelleborg Group in January last year, but the manufacturing of composite hoses has yet to begin due to the MCO.
Kai Lin is non-committal about when production will commence, but says that revenue contribution from the JV will not be very significant in the initial stage.
Wellcall, which holds a 49% stake in the JV, has incurred a total investment cost of US$2.2 million (RM9.05 million). The remaining 51% is held by Trelleborg, which makes polymer products that seal, damp and protect critical applications in demanding environments.
“We want customers to have more product choices. With this collaboration, we seek more business opportunities going forward,” says Kai Lin.
Trelleborg currently manufactures composite hoses in Europe. The products are typically used for road and rail tanker trucks, aviation fuel and aggressive chemicals.
Going forward, Wellcall does not rule out mergers and acquisitions, including acquiring plastic hose manufacturers to broaden its product offerings.
Kai Lin says the price of raw materials such as natural rubber, synthetic rubber and chemicals are under control.
Being in a net cash position at RM44.98 million with zero borrowings as at end-June, the company has been delivering consistent earnings of over RM30 million in the past few years.
Based on its closing price of 84.5 sen last Wednesday, which gave the company a market capitalisation of RM420.4 million, the stock offers a dividend yield of 5.6%. It is worth noting that Wellcall has been paying dividends since its listing in 2006.
Despite the challenging business environment, Kai Lin is certain that the company will stick to its 50% dividend payout policy.
In an Aug 25 note, Inter-Pacific Research says Wellcall deserves a richer valuation compared with its previous valuation, underpinned by the company’s dividend yield of 5.3% and 5.9% over the next two years.
The research house maintains its “buy” call, with a target price of RM1.
“Wellcall’s investment merits are lean/efficient management that translates into higher margins; sustainable growth in the hose replacement market; attractive dividend yield; and JV with Trelleborg to distribute composite hoses,” it says.
Inter-Pacific, however, revised its FY2020 and FY2021 net profit estimates for the company by -16% and -10% to RM27.1 million and RM33.3 million respectively, in anticipation of a slower recovery in demand for industrial hoses.
Non-independent non-executive director Tan Kang Seng is Wellcall’s largest shareholder with a 0.34% direct stake and an 11.24% indirect stake.
Meanwhile, Sha’s direct and indirect holdings stand at 3.4% and 0.03% respectively.
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