By Stella Goh – As published in Inve$t Malaysia 30 April 2020 issue
Wellcall Holdings Berhad (WELLCAL) was founded in 1996 and is based in Lahat, Perak. WELLCAL is involved as Malaysia’s largest industrial rubber hose manufacturer that specializes in manufacturing of rubber hose for Original Equipment Manufacturers (OEM) and manufacturers.
WELLCAL was listed in ACE Market in 2006 and successfully transferred onto Main Market of Bursa Malaysia on 3 March 2008. Their over 20 years in the rubber hose industry and with over 40 years of industry knowledge has served a solid platform for its presence in the global rubber hose marketplace. The customer base of the company spans from Malaysia to the Middle East, Europe, USA, Canada, Australia, New Zealand, Asia, Russia, Africa and South America.
WELLCAL is focused on being a “One-Stop Complete Industry Hose Sourcing Center” and principally places a lot of emphasis in Research and Development (R&D) to produce a wide and diversified range of high quality and value-added industrial hose products in order to cater to a vast variety of applications. Their hoses are used in industrial and construction sites, mining, automobile, petroleum, oil & gas, land transportation and food & beverages.
Typically the company produces and exports various types of hoses including extrusion & Mandrel built hoses, single and twin welding hoses, general and multi-purpose air & water hoses, tank truck hoses, sand blast hoses, concrete and cement hoses, food suction & delivery hoses, mining air and water hoses, marine fuel hoses and marine exhaust hoses just to name a few.
WELLCAL has achieved a consistent growth in its quality of earnings over the past 3 years (1.332 times) in FY2019 compared to FY2018 indicating that the operating cash flow generated from the business is more than the net income suggesting that the business has a strong cash flow and is financially sound.
Based on the computation of liquidity ratio, WELLCAL has achieved the highest current ratio of 4.661 times in FY2019 over the past 3 years indicating that the company does not face any liquidity issue as it is capable of paying back its current liabilities (RM16.504 million) if any unforeseeable circumstances occur. WELLCAL is able to do so by using current assets such as inventories, trade and other receivables, cash and bank balances amounting to RM76.924 million.
WELLCAL had a higher annual total dividend per share of 5.65sen in FY2019 compared to 5.45sen in FY2018 but was lower than the 6.17sen it paid in FY2017.
Despite the total dividend per share paid in FY2019 being not the highest in 3 years, WELLCAL has been able to pay out a favorable dividend consistently. The company has maintained an average dividend payout ratio of 85.22% over the past 6 financial years. And by paying out 70% of its annual net profit as dividends, it has exceeded its own practice of paying out at least 50% of its net profit per year as dividends.
The gross profit margin in FY2019 has increased by 13.19% compared to FY2018 mainly due to operational efficiency arising from effective costs management and productivity such as lower raw material purchase costs, better control on stockholding period and maximization of raw material usage to reduce wastage and scrap in the production processes. However the decrease of gross profit margin from 36.89% in FY2017 to 31.98% in FY2018 was mainly due to higher cost of production arising from higher and fluctuating raw materials prices.
WELLCAL’s Return on Equity (ROE) has increased to 31.62% in FY2019 from 29.45% in FY2018 but was still lower than the 35.35% in FY2017. The company was still able to maintain the ROE at a double digit indicating that it is being well managed and is making good profit relative to shareholder’s capital and reflects the management’s effectiveness and capability in deploying its resources.
WELLCAL has a decreasing Total Debt to Equity ratio of 0.187 times in FY2019 over the past 3 years indicating that the company is good at paying off its debt obligations. The Total Debt to Equity ratio based on 3 years is less than 0.5 times indicating that the company’s liabilities is less than half of its equity reflecting the company has a lower risk.
[Note: There is no short-term debts and long-term debts incurred during FY2018 and FY2019]
Cash Flow Statement
The net cash from operating activities has provided a positive cash flow of RM49.035 million in FY2019 as compared to RM40.940 million in FY2018 indicating that the company is healthy and has enough cash to use for business expansion.
The net cash from investing activities in FY2019 (-RM5.556 million) in FY2019 was mainly due to the purchase of Property, Plant and Equipment (RM6.202 million) and investment in associate company (RM49) attributed as share of loss in associate company. The negative cash flow indicates that the firm is continuing to invest in its business for growth.
The net cash from financing activities in FY2019 (-RM27.885 million) was mainly due to dividend paid amounting to RM27.885 million.
Prospect and Challenges
The outlook and headwinds for the global economy remains challenging, particularly in the industrial rubber hose market. WELLCAL’s strategies are to focus on leveraging its extensive customer network, productivity, quality service and product range to enhance its competitive edge.
WELLCAL also has initiated its product diversification into composite hoses entering a Joint Venture (JV) 51%: 49% with Sweden’s Trelleborg AB subsidiary Trelleborg Holding AB (THAB) on 15th January 2019. The joint venture has produced Trelleborg Wellcall Sdn. Bhd with the purposes of manufacturing, marketing and selling of composite hoses and fittings to the Asean market with deliveries scheduled to begin in 2020. Typical applications for hoses in composite materials include hoses for road and rail tanker trucks, hoses for aviation fuel and hoses for aggressive chemicals. According to Jean-Paul Mindermann, the President of Trelleborg Industrial Solutions business sector, Trelleborg will contribute technological know-how in composite hoses and WELLCAL, with its operations based in Malaysia, will contribute local knowledge concerning both the market and operations.
Return on Equity (ROE) = Excellent
Revenue [CAGR] = Average
Net Earnings [CAGR] = Average
Dividend Yield = Excellent
Interest Coverage = Excellent
Quality of Earnings = Excellent
Wellcall Holdings Berhad Share Price Over 3 Years
Based on the calculation of Discounted Cash Flow Model, WELLCAL has an intrinsic value of RM0.907 with a margin of safety of +11.80%. The current share price of WELLCAL is RM0.80 which makes it in the range of fair value (as at 29 April 2020). WELLCAL has a beta of 0.809 (500 days) indicating that the share price is less volatile than the current market. Based on computation of Compound Annual Growth Rate (CAGR), WELLCAL has an expected market return of 0.82%.
In conclusion, WELLCAL is paying out more than half of its Net Profit as dividends. With the consistent dividend policy, it helps to generate investors’ confidence. However investors still need to consider a host of other factors apart from dividend payment when analysing a company in view of the weak global economic outlook and challenges ahead.
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Probably hidden champion among stocks in KLSE. But is the market competitive? Its market cap. is small though. Thanks for the analysis!