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/ 

Limit Down on Gadang??

The fourth quarter has reported a net profit loss compared to preceding year result, which is a shocking result to all investors.

The stock price has been increasing for more than 80% since last Dec'18.

Market has reckoned that Gadang would be benefited by the recent revival projects from the ECRL and the development of Bandar Malaysia. 

For the current year to date, revenue increased to RM699.89 million from RM594.77 million in the

preceding year to date. Profit before tax decreased to RM71.02 million from RM132.10 million in the

preceding year to date. The lower profit for current quarter and year to date was mainly due to recognition of some variation orders for completed construction projects in the preceding year and the significantly lower profit reported for the Capital City project in the current year.

At here, the management does not mentioned clearly on the reason of causing lower profit recorded in this year.

Administrative expenses has reduced.

Administrative expenses and other expenses for the current year to date decreased by RM19.38 million as compared to the preceding year to date. This was mainly due to the following:-

• share option expenses for Employee’s Share Option Scheme decreased by RM3.58 million;
• one off impairment cost of RM10.49 million in relation to investment properties, inventories and
• other receivables in the preceding year; and
• unrealised loss on foreign exchange decreased by RM4.16 million.

Although operating costs has reduced, the cost of sales has increased by RM 184.435 mil or 46%.  The growth margin has drastically reduced by almost half from 33% to 16%. It is a sign of making less profit with the revenue recorded.

Construction Division (Highlight)

The profit before tax decreased to RM0.13 million for the current quarter as compared to profit before tax RM14.35 million in the corresponding quarter of the preceding year. This was mainly due to lower profit margin reported for on-going projects.

The question to the management, how can the profit margin suddenly drop for so much in a single quarter? Man power supply issue? Material issue? 

Mega construction projects have just revived mid of the year. We will foresee the major construction work will only start in second half year. Hence, it should be no big impact on material issue. 

The only possible reason that I reckon would be caused lower profit margin would be Raya season with slower construction work on going.  

Revenue for the current year to date increased to RM489.01 million as compared to RM378.13 million in the preceding year to date. However, profit before tax decreased to RM41.55 million in the current year to date as compared to RM82.72 million, mainly due to higher volume of variation orders recognised in the preceding year.

In short, Last year earn more than this year. 

Property Division (Highlight)

Revenue for the current year to date decreased marginally to RM187.65 million as compared to RM193.83 million in the preceding year to date. However, profit before tax decreased to RM37.76 million as compared to RM66.96 million in the preceding year to date, arising from the significantly lower profit reported for the Capital City project in johor.

Company Prospect Highlight

Although construction division is having an outstanding order book at RM1.24 bil which enough for the division to busy for the next two years. However, with this kind of disappointing profit margin return, the order book is just enough to cover the division operating cost. The management should get new projects with higher profit margin to sustain the earning. 

For property division, the management has intended to delay new launch development projects. Therefore, the profit margin will continue to be lesser as Capital city project. 

The mini-hydro power plant construction work supposes to complete commission and start generating by this financial year, however, the project has been delay to the coming financial year. 

Overall conclusion for fourth quarter report, it is a sell call for gadang in near term. Disappointing return is still remained as management doesn't provide a clear solution to improve the current situation.  

Annjoo Q1 2019

Annjoo posted net losses for its 1st quarter report for FY 2019. A stark contract of its net profit compared to Q1 FY18 and Q4 FY18 as much as -111% and -120% respectively.

Look in detail of its financial statement showing that the group operating expenses have surpassed its revenue which is severe as every single tonnage that send out from production has already losing money.

Lower revenue and the loss incurred in the first quarter of 2019 (“1Q2019”) as compared to the previous year correspondence quarter were mainly due to lower tonnage sold coupled with depressed selling price in domestic market despite higher export tonnage in 1Q2019.

Lower revenue and the loss incurred in 1Q2019 as compared to fourth quarter of 2018 (“4Q2018”) were mainly due to lower sale tonnage coupled with depressed selling price arisen from the oversupply condition in the domestic market. 

Based on business segments review, manufacturing segment is turning red for 2 quarters; it started since last quarter (Q4 2018) when the group claimed that the decline in selling price which mainly attributed to the over supply situation due to a new competitor that foreign owned steel mills entering into domestic market. Manufacturing segment losses turn more severe in Q1 2019.  

Trading segment can consider still doing fine amid the slow economic growth situation. The group has increased their export volume as it can see from the geographical segment. Which is a good strategic from the management. 

Overall the company prospect is not encouraging.

Bad Points from Prospect: 

1. severe domestic oversupply situation (still unsolved)

2. expects a lower second quarter of 2019 due partly to seasonal factors that typically affecting construction activity, including the Ramadan month and Raya holiday. (Management does not look good on next quarter result)

3. oversupply situation in the domestic industry is still a main concern as steel prices continue

to be depressed by foreign-owned steel mills. (Domestic sales been threaten by foreign owned steel mills)

4. discussions with the relevant government authorities to resolve the current issues faced by the steel industry (Currently still in the midst of discussing with related government authorities, no solution and timeline at this moment yet)

Good Points from Prospect:

1. domestic sentiment has improved with the revival of selected mega infrastructure and large scale

development projects, for example the East Coast Rail Link and Bandar Malaysia.(coming second half year mega projects will revive.)

2. the industry is constantly in proactive discussions with the relevant government authorities to resolve the current issues faced by the steel industry. (At least some approaches to resolve the price war issue)

3. The Group remains highly responsive to market changes and agile in sales mix to meet international demand and targets to increase export sales (goods sold has shifted to export)

Comment:
Annjoo Q1 FY19 result is very disappointing, the domestic steel price competition issue remains unsolved for 2 quarters and no concrete solution to counter it. Therefore, the group will remain in red for the following quarters until the domestic demand recover again.

Technical analysis:

Annjoo price is currently making the 3rd Elliot downtrend wave. The price has dived below MA 9 and 200 meaning that in short and long term the stock is moving in a bearish trend.
The next support line I will see it at RM 1.30.

It is not a good sign to bottom fish now. I will wait until the demand boosted by those revival mega projects

Weekly Technical Highlight (13/5/19)

After the trade talk fail between US and China, US has on Friday (10-5-2019) raised the tariff on $200 billion of Chinese imports to 25% from 10%. The globe will slap with another wave of market turbulence.
Technical analysis will not be able to forecast stocks movement. It has to go back to fundamental of each stock. The latest trade war will cause Asian market turn into red. Exporting companies which competing with China product will be benefited in this condition.

Back to local market, Bank Negara has cut its overnight policy rate to 3% on Tuesday. The reduce in interest rates can offer monetary stimulus to the economy as the US-China trade war continues to pose downside risks to growth. The interest rate cut has further weaken the RM against USD as we can see that the trend is raising steadily upward beginning at the end of March. It will further benefit export sectors in Malaysia.

Stocks with possible bullish:

Gkent is closed to break the bullish trend. It is critical moment to monitor the stock movement. But it might not able to stay positive as the uncertainty news from trade war. With the weakening of RM in this period, it will provide extra foreign gain for Gkent metering division.

If the price does not break below support line and stay above RM 1.19, it will be an uptrend. Buy when rebound.

Kenanga Research said the oversupply concerns affecting the rubber glove sector appeared to be overplayed and that this would only be a temporary rough patch.

Glove maker will see better quarters ahead with the recovery in demand and average selling prices (ASPs) as well as the weakening of the ringgit against the US dollar. 

Interestingly, industry ASP pressure is well contained, ranging between US$21 and US$23 per 1,000 pieces as compared to the previous downcycle in 2016 ranging between US$19 and US$21 per 1,000 pieces

Overall, Harta is worth to monitor next week, grab at low when there is panic sell happen. In coming quarter, Harta is definitely doing better than this quarter. Target price to collect at RM 4.80. 

Homeritz and Pohuat are potential winners of the trade war and interest rate cut as both companies are exporting furniture to US and Europe.

IGBreit is moving in sideway with positive momentum. Hence, I believe it can make another touch at RM 1.90. The recent interest rate cut has brought attention to REIT sector. But i believe the price has already factored in as market majority forecast that Bank Negara will cut the interest.   

While Pavreit will have a little slow momentum compared to that of IGBreit. It will also hit the resistance line at RM 1.85. 

However, REIT have already overpriced, somemore, not much margin to move up. Therefore, the risk to buy now is definitely high. 

On the other hand, banking sectors will oppose with REIT movement. CIMB and Maybank stock prices have slumped a lot after Q4 FY18 reported. Both stock are still moving in bearish trend. I believe the downtrends are almost ended. 

After the announcement of interest rate cut, both banks reacted fast to reduce their interest rates. The prompt action will potentially pull some fresh loans from other banks. 

Stock that turn into bearish trend:

Annjoo price has broken down the support line. Hence, bearish trend initiated. Next support line will be RM 1.49-1.51. At this point, investor should execute cut loss when necessary. 

Same goes to VS, the stock price has broken below its support line. The price will move in a major down trend with possible of 3 motive waves. As market worries with the latest report of lower revenue recorded from electronic industry. 

Gadang after announced the private share placement news, the stock have loss momentum and fall near to the support line. I anticipate that the price will move within the range of  RM0.79 - 0.87 when it reaches its support line.  

Harta Q4 FY2019

Harta 4th quarter revenue has improved compared to preceding year due to higher sales volume. However, PBT affected by fluctuation in currency causing a reduction of 15.8%. Higher labour cost as the minimum wages adjustment took effect in earlier this year. 

Total year revenue increased by 17.6% due to the improvement in sales volume of 10.1%, in tandem with growing demands for nitrile gloves and continuous expansion for their production capacity.

Throughout the reporting period, USD/RM trend is very fluctuating. It can drop around 2% within a month. Hence, export sectors who their operating revenue and operating cost are very sensitive with foreign currency will get affected. 

Looking at the asset, the management has reduced their inventories in this quarter. Trade receivables have increased which showing signs of more sales have yet to receive payments. It is good for management to reduce their inventories, as it can show that their operation processes are lean enough. However, payment receivable might show that the recent market is not doing great.

Total liabilities has increased by 15.2%. Although long term borrowing has slightly reduced, short term borrowing on the other hand has increased by 15%. Checking on operating activities, it is still maintained growing positively. Hence, the company performance is considered very healthy. Borrowing might be used in the plant expansion activities.

Compared to previous quarter, the group reported the reduction in sales revenue was mainly due to lower average selling price. Meaning that, currently the group is facing keener price competition on selling niltrile gloves as mentioned by few research houses.

The management has mentioned again in its prospect that currently company is facing over supply issue where supply grows faster more than demand.

Comment:
1. Management has admitted that the gloves have been over produced. Therefore, it will take some time for market to absorb the access capacity remain and industry players will slow down their production capacity expansion activities to align with market demand growth. I anticipate it will take a year for the market to recover.
2. Currency has been growing rapidly from end of March until now. Q4 report showing that the currency has badly affected the profit, on the other hand, the coming Q1, we shall see profit gain from USD/RM strengthening.
3. Company is not performing in Q4, as management was unable to hedge the fluctuation in the currency and the market demand has reduced. Therefore, I believe tomorrow there will be a heavy sell down pressure on Harta. The support line is RM 4.87. If the price cannot hold above it, it will be a bullish trend coming soon.

Weekly Technical Highlights (week 06/05/19)

KLCI is still in a bearish trend. This week KLCI closes with a doji. Expecting KLCI to close lower for month of May. Traders are making trade cautiously as this is a month of Q1 report releasing season. 

Profile stock list:

Possible bearish: (Next week)

1. EWINT

2. Gkent

3. Homeritz

4. Pohuat

5. VS

Possible bullish: (Next week)

1. CIMB

2. Gadang

3. Maybank

Possible sideway: (Next week)

1. Annjoo

2. Harta

3. IGBreit

4. JAG

5. L&G

6. Pavreit

7. YOCB

1. Annjoo (Sideway)

The revival of mega structure projects announced by government last month has boosted the price drastically. The good news has been digested by the market, the heat in the stock has faded off.  The resistance point is at RM 1.77. The dividend issued is expiring soon, there will be a price adjustment afterward. Currently, the price is at the lower part of the mother bar. Hence, it is expecting to move in the inside bar trend. Hoping the price will hold on the uptrend momentum and will not fall below the support line which looking at RM 1.67. Else the bearish trend will start again. 

It is not a good point to invest in this stock, moreover, the quarter report is going to release in end of this month. 

2. CIMB (Minor Bullish)

CIMB Group has informed that the release of the first quarter of financial year 2019 (1QFY19) results on May 29. Key takeaways are management reiterated its guidance for loan growth of 7% for 2019. In Malaysia, 1QFY19’s loan growth was good, supported by drawdowns of corporate loans — similar to that in 4QFY18. The management guided for 6% to 7% loan growth for Malaysia. Lending growth in Indonesia is expected at 5% in 2019, on a pickup in the second half (2H) of FY19.

CIMB expects the policy rate in Malaysia to remain stable in 2019. For 1QFY19, we expect NIM to be stable to slightly better. The management expects margins to compress in the quarters ahead, as loan growth gathers momentum in 2HFY19.

With the market confident that Bank Negara would remain the interest rate, banking sectors will slowly regain the price.

3. EWINT (Bearish)

EWINT has broken down below the strong support line at RM 0.72. The price will not able to recover back easily. Market sentiment is weak due to the falling in property price in UK. Hence, I anticipate that the price will move near to the lowest point and rebound. Hoping that it will not make a new lowest point record. 

4. Gadang (Bullish)

Last week I anticipated that the stock will turn into bearish and meet the support point at RM 0.79. The price does not fall below support line but rally. Thus, it is a good sign for Gadang. Next week price will continue with the uptrend momentum. However, there is still a risk as the price is moving below 9 MA line, where the uptrend will be very weak. If the price can breakout 9 MA line and next resistance line at RM 0.89 and stay above them, then the price will move in a strong bullish trend. 

At this moment, no more supportive news from government to boost the construction sector. Hence, Gadang is now a bit overpriced. 

5. Gkent (Bearish)

I give a bearish call for Gkent due to the price closed below the mid point of previous candle and CCI is still moving in negative territory. If the price didn't break below the strong resistance line at RM 1.22, Gkent is still moving in the correction wave. Else, the trend will turn into strong bearish. 

It is good to accumulate Gkent at the end of the correction wave, future perspective for the group is still remain positive. It has an outstanding order book stands over RM 5bil on the LRT3 project, two government hospitals and others. Its water meter division has a contract of supplying 110,000 meters to Singapore over six months beginning of Feb 2019.

6. Harta (Sideway)

Harta share price is expected to move in sideway toward the tip of the symmetrical triangle pattern. Some research houses forecast that the coming quarter result will slow down due to the pressure on the ASP and competition in the nitrile glove segment. Therefore, I shall wait for the performance of the Q1 to decide on topping up the holding amount. 

7. Homeritz (Bearish)

It is not a good sign for Homeritz yet, the price is still moving under 200 MA line and it is considered a bearish trend. After the quarter report released, stock price shoot up accompanied with the high volume traded. However, the momentum cannot maintain, causing the price to sink down. A bearish call for Homeritz because the trade volume has reduced, price is hardly to push up further. We would have to wait for the free warrant issue date to be announced to boost the trading volume again. 

Future prospect for Homeritz is still remain healthy, average USD/RM for Q3 is 3-4% higher than previous year. Hence, I am sure Homeritz will give another good result for next quarter.

8. IGBreit (sideway)

Same as last week comment.

After hitting the 52 weeks high, the price has been retreated and stay in side way. The price is still moving in uptrend pattern resistance and support lines at RM 1.90 and RM 1.86 respectively. The short term bullish is still effective as the price stays above 9 MA line.

9. JAG (sideway)

Same as last week comment.

Daily trade volumes are less. Price moves within the range of RM 0.05 to RM 0.045. Side way pattern.

10. L&G (sideway)

L&G has the same trend pattern as JAG. As mentioned earlier, the volume reduced. Hence, no sign of momentum. Stock traded in the range of RM 0.16 to RM 0.15. Both companies require catalysts to stimulate the uptrend.

The coming quarter report result will not be better than previous year as the contribution of RM7.54 mil from the write back of its Damansara Foresta project and RM10.22mil from the writeback from the resolution of prior years taxes with tax authorities. But, the coming financial year will be giving a better result. Therefore, it is a good chance to accumulate this stock while it still stay at lower point. 

11. Maybank (Minor Bullish)

Maybank Indonesia reported a lower net profit of 414.9 billion rupiah for the first quarter of 2019, compared with 463.1 billion rupiah in the previous corresponding period due to a higher loan loss provision of 52.2% y-o-y to 400.5 billion rupiah as the bank took a conservative stance in setting aside the provision for business loans, which were impacted by the continued challenging  economy. Maybank Indonesia revealed that overall, its asset quality continued to improve as reflected by the lower non-performing loan levels of 2.9% (gross) and 1.7% (net) as at March 31, 2019, compared with 3% (gross) and 1.8% (net) a year ago.

During the period in review, the 97.4%-owned unit of Malayan Banking Bhd reported a 6.2% increase in operating income before provisions to 966.5 billion rupiah (RM281.5mil), compared with 909.7 billion rupiah in the previous corresponding period.

The group said the growth in operating profit was mainly supported by improvement in net interest income, as loan growth reached 10.9% year-on-year (y-o-y) for the first three months of 2019.

Maybank Indonesia said its net interest income grew 7.7% y-o-y to two trillion rupiah, while net interest margin for the quarter was unchanged at 4.8%. The group’s loans grew to 135.8 trillion rupiah from 122.5 trillion rupiah a year ago, driven by its global banking segment, which booked a strong loan growth of 29.8% y-o-y supported mainly by loans from state-owned enterprises and top-tier corporates.

With the market confident that Bank Negara would remain the interest rate, banking sectors will slowly regain the price.

12. Pavreit (sideway)

The price movement was not as severe as I anticipated last week. The price will move in sideway in the range of RM 1.85 to RM 1.80.

13. Pohuat (Bearish)

Pohuat price is moving in a rectangle pattern. The price is expecting to fall back to the support line at RM 1.50 then rebound back again to touch the resistance line at RM 1.56. 

Hence, it is worth to collect at the low (RM 1.50) and sell it at high (RM 1.55) for short term trading. For the coming quarter Q2, I forecast that Pohuat will be benefited from the gain in foreign currency and also increase in revenue due to the recent orders from new customers. 

14. VS (Bearish)

VS has touched the support line, CCI continues to move lower. Hence, it has higher possibility that next week the price will fall below the support line and move into bearish trend. If next Monday price rises and closes with a green candle, it will create a morning star pattern. Then, price moving in the rectangle pattern is still maintained.

 15. YOCB (sideway)

Same as last week comment.

YOCB would move in sideway next week as the trading volume reduces. The stock price cannot move up as no news to catalyze it. We will have to wait until the next quarter report to announce.

Expecting stock price to remain at RM 1.20 for the following week.