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5 Key Insights About Wellcall Holdings Bhd

Wellcall Holdings Bhd listed in the Main Market of Bursa Malaysia on 18 July 2006. The company is an original equipment manufacturer (“OEM”) of industrial rubber hoses. These hoses are used in various industries. This includes oil & gas, automotive and F&B industry, etc.

Rubber Hose Application

Not many knows about this company. Those that know, probably are dividend investors. This is because of the company’s track record of dividend payment. Even during the covid-19 outbreak, Wellcall still able to payout dividend of RM0.0495 per share.

So, what makes this company so attractive among dividend investors? Here are 5 key insights about Wellcall that you need to know:

#1: RECURRING INCOME

Wellcall has 2 main categories of rubber hoses; 1) extrusion hoses; and 2) mandrel hoses. The latter has much higher profit margin. Below is a list of applications I extracted from Maybank Research report:

Wellcall Product
Source: Maybank Research Report

These industrial hoses are consumables. It typically has short lifespan of a few weeks before it is replaced. As such, it provides some kind of recurring income to Wellcall. According to the company’s 15th AGM, Wellcall’s customer retention rate is at 98% in 2020.

#2: EXPORT-ORIENTED BUSINESS

As of 31 December 2020, approx. 90% of Wellcall’s total revenue comes from overseas market. This is good because the company has bigger addressable market. Concern regarding the company’s growth saturation will not arise.

Wellcall Revenue by Geography 2020
Source: Company’s Annual Report

According to ResearchAndMarkets.com, the global industrial hose market is expected to grow at CAGR of 9.9% in the next 4 years. This means Wellcall still has room for growth in their business.

However, there will be forex loss concern if MYR strengthened against the USD or Euro. This is because approx. 87% of revenue and 31% of their costs are denominated in USD. But I think this might be unlikely considering the recent weakness in MYR. If anything, it actually enhances Wellcall’s profit.

#3: JV WITH TRELLEBORG HOLDING AB

In January 2019, Wellcall enter in a JV with a Swedish Company – Trelleborg. The JV arrangement is to set-up a production plant in Malaysia to manufacture and sell composite hose & fittings. Wellcall will own 49% stake in this JV.

Initially, the company plans to begin production in 2020. The lockdown due to the pandemic situation in Malaysia has lead to Wellcall reschedule the plan. In its latest AGM, the management expect to begin production in 3Q 2021 this year.

As such, I don’t foresee that this JV will contribute significant profit to Wellcall for now. Maybe in about 2 to 3 years’ time, we will see the positive impact.

#4: RISING RAW MATERIAL PRICES

As an OEM of rubber hoses, the main concern is raw material costs. Wellcall’s main raw materials are, 1) synthetic rubber; and 2) standard Malaysian rubber (SMR). Any fluctuation to these rubber prices may affect the company’s production costs.

With inflation on the rise, I believe that raw material prices will increase moving forward. This is especially true when global economy is recovering from covid-19. There is an influx of demand and this will put strains on the supply. When this happens, prices will increase.

On the bright side, Wellcall is able to pass down these costs to its customers. This is because the company’s products are usually customised to customers’ specifications. As such, there are some form of value-adding. This allow Wellcall to have certain pricing power. Unlike the usual OEM where they do not have pricing power over their customers.

Wellcall Earnings Power
Source: Shareinvestor.com

According to Wellcall’s executive director Alex Chew, the company also has the flexibility to switch between natural and synthetic rubber. This gives room to minimise its raw material costs. This explains why the company has been able to achieve double digit net profit margin.

#5: CONSISTENT DIVIDEND PAYMENT

Because of the company’s business model that is so resilient, it able to payout dividend consistently. Over the past 9 years, the company has not failed to reward its shareholders. Its dividend payout ratio from 2012 to 2020 has been consistently above 60%.

Wellcall Dividend Analysis
Source: Shareinvestor.com

That said, the company’s dividend per share is still quite volatile. If you’re expecting a yearly increase in dividend, this company might not be your cup of tea.

MY INSIGHTS

In a nutshell, Wellcall is a good dividend-growth company. This is because it has a recurring income business model & potential growth from Trelleborg JV. At the time of writing, the company is trading at RM1.04. This gives a dividend yield (DY) of 4.75%. Assuming the company will payout similar dividend as prior year.

At this level of DY, it is lower than its average 10-year DY of 5%. This means Wellcall currently slightly overvalued. But I do think that the company will increase its dividend as businesses started to recover. In its 2Q 2021, the company has already posted an increased of 28% in profit before tax when compared against 2Q 2020.

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DISCLAIMER: The above mentioned stock is NOT a recommendation to buy or sell but merely for education purpose. You should do your own due diligence on this company before making any investment decision. The author is not liable for your profit or losses made out of your decision to buy or sell.

The author has vested interest in the abovementioned stock. As such, his view might be biased.

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Thomas Chua

Founder of Stocks Insights. Prior to this, he was as an external auditor where he perform statutory audit on listed companies from various industries. He also involved in Enterprise Risk Management exercise and Internal Control Framework Review for entities undergoing IPO in Bursa Malaysia and SGX Catalyst Board. He is also a member of ACCA.

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