• We visited Wellcall Holdings Berhad (Wellcall) plants at Pusing, Perak,  recently and came back feeling upbeat on the group’s prospect amid  encouraging demand from exports sales stemming from steady  replacement market for rubber hose usage. On top of that, the group  is prudently overseeing its operating expenses in order to safeguard  profitability.

• Maintain a BUY call on Wellcall with unchanged TP of RM1.41. Our  valuation is based on average 3-year high PER of 19x that is pegged to  FY24F EPS of 7.4sen. Key takeaways from the visit:

• Steady industrial rubber hose demand. We understand that the  production of industrial rubber hoses is currently operating at a  satisfactory level, with both Plant 1 and Plant 2 running at maximum  capacity, and Plant 3 operating at 80% utilization rate on a single shift  basis across all plants. Plant 3, which focuses on the production of  Mandrel and Spiral, is equipped with technologically advanced  production lines and machinery that enhance production quality and  efficiency. Most of the production is catered for the oil and gas (O&G)  industry, with approximately 50-60% of the revenue being contributed by  both upstream and midstream segments. It is worth noting that bulk of  the orders come from the replacement market, as rubber hoses have a  limited lifespan of between 3 to 12 months due to industry regulations and durability requirements.

• Effective cost containment measures. Wellcall is watching closely the  trend of raw materials prices (i.e., synthetic, and natural rubber) to  ensure cost efficiency. The Group will stock up their inventory levels for  three to six months during price dips, and up to three months when prices  increase. This strategy ensures cost-effectiveness in managing operating  expenses and protects margins. Recall that in the previous analyst  briefing the management was optimist that it can maintain average  selling prices (ASPs) after two rounds of price hikes in 2Q-3QFY22. Note  that the Group is maintaining price competitiveness in order to preserve  market share wherein pushing another round of price hike will only lead  to smaller orders from customers. Nevertheless, a revision in ASPs will  take place only if there is a substantial jump in raw material prices.

• Our View. We are optimistic on Wellcall prospect given its steady market  share in the industrial rubber hose industry. We expect exports sales to  remain intact in view of strong products demand in global market. Also,  the easing of raw material price (natural rubber price) and freight cost  due to improving port congestion will lead to better-than-expected  margin. On top of that, the Group’s orderbook visibility is healthy with  rising order volume following recovery in global demand for industrial  hoses, a boon to overall performance.

• Our call. Our FY23F-FY25F earnings forecast remain intact at this  juncture. Maintain a BUY call on Wellcall with an unchanged TP of  RM1.41. Our valuation is based on average 3-year high PER of 19x that  is pegged to FY24F EPS of 7.4sen. Our favourable view on Wellcal is  driven by its healthy margin, attractive cash position and dividend yield.

Source: BIMB Securities Research - 23 Mar 2023