Wellcall Q4 2019 Review

Quarter Performance Within Expectation!

Q4 revenue contracted 9% from RM45.561mil to RM41.427mil due to slow down in local market and export market by 31% and 6% respectively compared to preceding year corresponding quarter. According to Inter-pacific research, the local market demand is related to construction sector activities.

We can see that for the full FY19 the sales order from export market has improved by 1.7% compared to FY18. However, Q4 has seen reduction in few regions; Middle east, Europe and Australia/NZ. With the current lackluster global economy and US China trade dispute, I might see a further contraction on future order.

Despite lower revenue earned for the current quarter ended 30 September 2019, the Group able to maintain its fairly consistent PBT of RM13.031 million as compared to PBT of RM13.237 million recorded in the corresponding quarter ended 30 September 2018 mainly due to operational efficiency arising from effective cost management and productivity.

The Group successfully sailed through the volatility of global industrial rubber hose market, recorded revenue of RM170.109 million in current financial year with slight decrease of approximately RM1.015 million (1%) as compared to previous financial year of RM171.124 million. The export and local market contributed approximately 91% and 9% respectively to the Group's annual revenue.
The overall revenue achieved remain fairly consistent with previous financial year was mainly attributable to continuous orders and market demand for industrial rubber hose.

The Group recorded a high PBT of RM49.532 million for the current financial year ended 30 September 2019 as compared to PBT of RM42.844 million recorded in preceeding financial year, representing an improvement of RM6.688 million (16%) increase. Higher PBT achieved was mainly due to constant operational efficiency arising from effective cost management, primarily resulted from productivity.

Full year EPS is within my expectation which I reckon to achieve 7.37sen. Despite the slow down in sales order, Wellcall can still present a higher gross margin after all. This has proven the capability of the management in managing their operation efficiently. Moreover, Management has issued a total of 5.65sen dividend full year which is equivalent to 5.04% DY. 

Healthy cash flow, it is actually a cash cow company. No debt no loan. Moreover, recently Wellcall has invested together with Trelleborg Holding for their JV company. 

Technical analysis

 The latest technical chart has shown that price has broken below the descending triangle trend. Meaning that it will be another wave of sell down. Overall trend is still bearish. I will just monitor at the moment without any buying action. As the new down trend is just initiated. It might partly due to the uncertainty of Wellcall future business order. Although 5% DY and price at 52 weeks low is quite attractive. I will wait for the Q1 FY2020 report to make buying decision. 

Wellcall Q3 2019 Review

The latest Qtr report Q3, 2019 has reported a steady growth performance on EPS despite a slightly drop on its revenue. 9 months cumulative EPS for FY19 has achieved 82% of my forecast EPS (6.57sen).

   

Despite this current quarter revenue has reduced by 3% compated to same quarter preceding year, the group has recorded a better PBT mainly due to lower cost of production resulted from cost optimization of raw materials costs.

The export market and local market contributed approximately 90% and 10% respectively to the Group's revenue. The slight decrease in revenue mainly due to the volatility of global economic
sentiment which had affected the demand for industrial rubber hose market.

Overall, revenue has slightly increased which contributed from overseas businesses that has cushioned the decrease in rubber hose demand in the local market. The improvement in revenue were mainly fairly benefited from the increase in selling price and volume for some hoses.

Compare to previous quarter, the revenue remains stable. While PBT has improved by 16% which I believe that the contribution from lower crude oil price recorded during this quarter.

  Crude oil price has reduced by 20% from one year earlier, I reckon that the group raw material costs should have been reduced as they are mainly affected the price. If we cross check with its quarter report performance, the PBT is in line with the finding.  

The coming quarter Q4 FY19, I will see an improvement in the group's gross margin and PBT performance as it is still enjoying with low material costs amid the uncertainty of global economy and the conflict between two main economic bodies. 

Assuming that the coming Q4 business will be remained stable as Q3 FY19 and Q4 FY18, I reckon a fair value of 1.94sen EPS and a cumulative EPS of 7.37sen could be achieved. 

With the PE of 17, the expected target price of RM1.25 is given, a potential gain of 6.8% for the current market price.  

Technical analysis:

Although the price has recently break through the major bearish trend, the upward momentum has faded away and remained in side way trend. The price is still below MA 50 and 200 trend which can be acted as the stock resistance trend. Dividend will be paid out soon, price will be readjusted. No buying sign at the moment. 

WELLCALL (7231): Author's Review

Wellcall Holdings Berhad is the largest industrial rubber hose manufacturer in Malaysia. They have expanded their application markets into abrasion, air, automobile, chemical, food grade, marine, petroleum, fuel & oil, water, welding and miscellaneous. In other word, rubber hose is needed in any kind of industry.

Based on 2018 Annual Report, 89% of the group's revenue covering over 70 countries while the remaining 11% was contributed from domestic market. Hence, the global market sentiment will reflect on its revenue performance.

Financial Highlights

5 years revenue and PBT CAGR is about 3.2% and 2.0% respectively. Which is not considered as an aggressive growing company, the management is taking a steady and slow pace in managing its business. Gross margin for FY 2018 is around 32%, in this kind of competitive market, Wellcall can still sustain such high gross margin is worth to praise. Also, management have enough room to compete with competitors to secure the market pie. Dividend yield stands at 4.7% with the present share price of RM1.17. Book value to price is 18.5%. The current price is not attractive enough, slow and steady growth company usually will not bring up the share price value, 4.7% of annual return sounds less interesting, unless it is for long term investment. At the moment, the share price is still expensive. 

Net earning per share for FY18 has reduced by 13% compared to FY17. The main reason is due to pressure from the raw materials prices that continue to fluctuate which has resulted the group to incur higher cost of production. 

Comparing latex price for 2017 to 2018, FY18 was having lower material cost compared to FY17.  We can eliminate the risk from fluctuation in rubber price, as the group is enjoying lower material cost.  

Some hoses require synthetic rubber which produced from crude oil as raw material. We reckon that the high material cost incurred in FY18, resulting a lower PBT achieved in this financial year is partly from synthetic rubber which related to crude oil price. The crude oil price graph has shown that the price was high during FY 18 compared to FY 17.   

Market segment for Wellcall consists of export and local. The major export countries are USA/Canada contributing 28% of the export revenue, following with Europe 19%, Asia 17%, Australia/NZ 13%, Middle east 11%, South america 9% and Africa 2%. 

Hence, foreign currency plays a main role in its revenue and PBT performance. 

Strengthening of USD/RM by 10% will bring 4% increase in group's net profit. 

The latest 2nd quarter report of FY 19

EPS for 1HFY19 is 3.54sen which has increased by 25% compared to preceding year. It has achieved 55% of the FY18 result. 

If the demand for industrial rubber hoses continue to recover gradually from both emerging and developed economies, let's say we forecast a 3.2% growth for its business, the target EPS should be at 6.57sen. 

We expect 2HFY19 should hit a minimum of 3.03sen EPS. 

With the PE value at 17, the expected target price is about RM 1.12. 

Hence, current share price is slightly above the TP. Continue to observe on the price movement.

Technical Comment

We forecast that the crude oil price will trend down toward the year end. Hence, raw material cost will see reducing for Wellcall. 

Share price is still moving in a major bearish trend. 

At this moment, Wellcall share price is not worth to accumulate. We will see the trend turn upward if USD strengthen and Crude oil price drop towards the end of the year. 

Corporate news:

Wellcall charts another milestone when it inks a joint venture with Sweden’s Trelleborg Holding AB – a world leader in engineered polymer solutions provider.

This synergistic partnership will see Trelleborg transferring its technology and manufacturing know-how for the production of composite hose and fittings, enabling Wellcall to manufacture, market and distribute the hoses and expand its product offerings.

Currently, Wellcall produces extrusion, mandel, and spiral hoses in its three plants in Perak.

Industrial rubber hoses are used in construction, mining, automobile, oil and gas, marine, as well as the food and beverage industries.

Wellcall is in discussions with Trelleborg for the target production capacity and product pricing.

“Our focus this year will be to set up the composite hose manufacturing plant, targeted for commissioning by end-2019, with two production lines and auxiliary equipment.

“Composite hose is lightweight, flexible, pressure and vacuum-resistant, mainly used in the transfer of petroleum and chemical.

“It is also a cost-effective hose, as it does not require curing like rubber hoses,” says Huang.

The composite hose manufacturing plant will be built within the vicinity of Wellcall’s existing plant.

The initial issued and paid-up capital of the joint venture (JV) company, Trelleborg Wellcall Sdn Bhd, is US$2.2mil (RM9.2mil).

Trelleborg will own 51% equity in the JV company, while Wellcall the remaining 49% equity.

Both parties will be jointly liable for their respective shares of funding for the JV company.

https://www.thestar.com.my/business/business-news/2019/01/19/wellcall-gets-technology-boost-from-swedens-trelleborg/