by NUR HAZIQAH A MALEK / graphic by TMR

WELLCALL Holdings Bhd is witnessing a surge in demand for its products, led by customers in the US and Asia on the back of the global economic recovery. 

CGS-CIMB Securities Sdn Bhd analyst Walter Aw said Wellcall, the largest industrial rubber hose manufacturer in Malaysia, aims to offset the recent rise in raw material prices through higher efficiency and an overall improved cost-control. 

However, the brokerage maintained its financial year 2021 to 2023 forecasts (FY21-23F) of earnings per share for the group. 

“We retain our ‘Add’ call, with a target price of RM1.22, which is 15 times the calendar year 2022 price-to-earnings ratio, in line with its five-year historical mean,” Aw wrote in a research report on Wednesday. 

He said Wellcall’s orderbook visibility remains healthy up to the second quarter (2Q) of 2022, while its export orders continue surging, which is 2% of the nine months of 2021 total sales forecast. 

He added that the heightened demand is coming from new and existing clients, mainly from the US and Asian markets, driven by a pick-up in the global economy. 

The analyst noted that Wellcall has up to 200 customers, mainly distributors as Wellcall is an original equipment manufacturer. 

Aw said an estimated 50% of its sales are derived from the oil and gas industry. 

“The remainder of its revenue is derived from other industries, such as the air and water, welding, automotive, shipbuilding, abrasion, food and beverage, and chemical sectors,” he said, adding that no single customer contributes more than 10% of Wellcall’s revenue. 

At present, Aw said Wellcall is operating at 80% of its capacity since July 2021, given that all of its plants are located in Perak, Malaysia, which is under Phase 2 of the National Recovery Plan. 

The group is still finalising its workers vaccination plan, 360 personnel in total, and targets to complete by early October. 

Aw also noted that Wellcall’s production from its new plant under a joint venture (JV) with Swedish-based Trellerborg Holding AB had commenced in June 2021. 

“Wellcall expects this JV to be loss-making in the next two to three years, with ongoing marketing efforts to gain market visibility. 

“It plans to conduct more sampling and testing for its customers, while cross-selling these products to its existing customer base,” he said. 

Aw said Wellcall is confident of recouping its investment costs within five years from the commencement of the plant. 

Wellcall has allocated a paid-up capital of RM9 million for the JV, including RM5 million capital expenditure to set up the plant. 

Wellcall and Trelleborg entered into a JV in January 2019 on a 49:51 basis, to produce and market composite hoses and fittings. 

Under the agreement, Wellcall will manage operations, while Trelleborg shares its technology and know-how in these products. 

Meanwhile, Aw said Wellcall is trying to maintain its selling prices to encourage customers to increase their order volume, despite the rise in raw material prices, as the economies of scale would help offset the impact of the higher raw material costs. 

“In addition, Wellcall aims to focus on cost control by doing systematic bulk purchases of raw materials and constant negotiation with its suppliers. 

“It also aims to invest in automation and to upgrade its production to lower wastages and control costs better,” he said. 

He said the brokerage continues to like Wellcall, backed by its defensive demand, robust balance sheet and attractive dividend yields. 

He said Wellcall’s industrial hoses are used globally in various industries in the long run. 

Aw also noted that the group’s net cash stood at RM58.7 million as at 3Q ended June 30, 2021, while dividend yields hover between 5.7% to 7.5% for FY21-23F. 

“Potential re-rating catalysts include stronger-than-expected demand for industrial hoses while downside risks are weaker-than-expected export and local demand for industrial hoses and stronger-than-expected pricing competition,” he added. 

Wellcall shares closed unchanged at RM1 yesterday for a market capitalisation of RM497.95 million.