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Thursday, November 26, 2015

Wellcall’s new factory to boost mandrel hose production

This article first appeared in The Edge Financial Daily, on November 26, 2015.
Wellcall Holdings Bhd ( Valuation: 2.10, Fundamental: 3.00)
(Nov 25, RM2.45)
Downgrade to hold call with a higher target price (TP) of RM2.50: We maintain our earnings per share (EPS) forecasts and add new financial year ending Sept 30, 2018 (FY18) numbers.

Our TP rises as we roll forward to end-2016, based on 16.6 times calendar year 2017 (CY17) price-to-earnings ratio (PER).

We downgrade the stock from “add” to “hold” as the share price has risen 30% in the past three months and valuations are not cheap at around 2016 20 times PER.

In addition, dividend yields (of below 5%) are now less attractive. We prefer Kossan Rubber Industries Bhd ( Valuation: 1.10, Fundamental: 2.10) for exposure to the rubber-related sector.

Wellcall’s cumulative 12-month (12MFY15) net profit was above expectations at 108% of our full-year forecast, mainly due to excess capital allowances recognised in 4QFY15. FY15 revenue was only up 8% year-on-year (y-o-y), but net profit was up 40.5% y-o-y at RM41.3 million.

FY15’s net profit also benefitted from an export boost due to the stronger US dollar and low rubber prices. A 2.6 sen final dividend per share (DPS) was declared and in FY15, a total 9.2 sen DPS was declared, equivalent to a 74% net dividend payout ratio.

Asia and the United States remained Wellcall’s largest export markets in FY15, contributing around 40% of group revenue.

Other than South America, all export markets showed growth in FY15. However, local sales were disappointing, with flat growth in FY15. The company’s new factory is up-and-running and commercial production has started.

The new set-up will boost mandrel hose production capacity by 50% to 3.3 million metres per shift per annum. In addition, the new factory would include a new compounding machine and spiral hose line. Mandrel is the main product, generating 60% to 70% of the group’s revenue.

Wellcall’s balance sheet remains cash-rich, with RM18 million net cash as at end-September.

It looks like management is looking to build up its cash position again after giving out almost all of its profits over the past few years (FY15 net dividend payout ratio was 74%).

This is not a surprise as in FY15, the company borrowed RM25 million from banks to partially fund its RM35 million capital expenditure in the current financial year. — CIMB Research, Nov 24

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