~ wEllcAll (WELLCAL) 緯鉅集團 AnAlysIs ~

I guess investors who prefer dividend incomes surely will know this company, Wellcall Holding Berhad. Wellcall is located at Ipoh, ya, my hometown. It mainly manufactures industrial mandrel and extrusion hoses that cater to few applications markets and it’s the largest industry rubber hose manufacturer in Malaysia. Mandrel hoses have higher margin than extruded hoses. 

Based on past few years result, the group showed a good upward trend in terms of net profit albeit a sudden drop in FY2009 as the group was affected by the economic downturn and the demand for industrial hose is driven by the economic activity. The revenue for its latest financial year dropped around 15%, but still recorded a better bottom line thanks to lower raw rubber cost and favourable currency exchange rate.

Gross profit margin and net profit margin averagely at 25% and 15% respectively. There was a big drop in margin in FY2011 as the raw rubber cost was sky high that time. Bear in mind that the raw material cost contributed around 70% of the group’s operation cost. So any big changes in rubber price will has significant impact on the group’s earnings.

For the past few years, the dividend payout ratio was around 100%. Perhaps, this is the reason why the price is trading at a high PE currently. Based on the latest result and trading price of RM3.55, dividend yield is around 5% but PE is around 20 which is considered high for its market capitalization. 

In terms of balance sheet, current ratio and acid test are high. No borrowings at all and always keep a considerate amount of cash in hands since listed. Cash conversion cycle is good at around 50 days and able to clear the inventory in 2 month time. ROE is more than 15% and showed an upward trend as the group recorded better net profit years after years and kept a stagnant amount of shareholders’ equity due to the high dividend payout ratio. It’s similar to ROIC as the group has low non-current liabilities and stagnant shareholders’ equity with better earnings all this while. 

In terms of cash flow, the group able to keep a very good record of stable and increasing operating cash flow. Besides, the group spare a very small amount of its operating cash flow for capital expenditures every years. However, the group purchased a land adjacent to its current factory in FY2013 and planned to build a new factory on it only for mandrel hose production and be ready at Q1 2015. It’s believed that the new factory able to raise its mandrel hose production capacity by 100% in 2 stages. Total capex is around RM28-35 mil, 50 to 50 loan and fund internally. Not sure this will affect the dividend payout ratio or not but surely its sales team need to gear up to get orders by the time the new factory is fully commenced. Free cash flow and owners’ earnings are good with owners’ earnings/sales more than 5% which indicated it generated a healthy cash return to shareholders every years. 

Some additional notes are

• 1 bonus share for every 2 existing shares held in the company in FY2008
• Due to the nature of more than 90% of its products are exports, weaker US dollar will affect its result.
• Higher income tax from year 2011 onwards due to the expiry of pioneer tax rate relief.
• Most of Wellcall's production equipment is designed and built by the group itself, providing a substantial barrier to entry for competitors seeking to make mandrels of equivalent quality & cost.
• The group has built a strong customer relationship and a good reputation in the industry. Most of its customers have been in business with the group >10 years.
• Electricity and fuel cost are only 1.6% of total production costs. Thus, the tariff hike will not have much impact on it probably.
• The group maintains a buffer of 1 to 2 month worth of natural rubber and 2-3 months of synthetic rubber to buffer against volatile raw material prices.
• The group is focus on production automation and R&D to improve the productivity and efficiency to reduce their dependence on manual labour.
• Propose a share split of 1 ordinary share of RM0.5 each into 2.5 ordinary share of RM0.20 each to increase share liquidity, target to finish by this year.
• Trade receivables, payables and cash mostly denominated in RM.

So in terms of PE, it's considered quite high for its market capitalization but the dividend yield is still okay with distribution every quarter like Prestariang and Zhulian. I did a reverse discounted cash flow on it, the market is currently predicting a 6.5% growth for its owners' earnings only. With the raw rubber price still in no good mood to show an upward trend and a strong USD dollar against Ringgit currently, both elements will help Wellcall sustaining its bottom line this year although the drops in revenue last year is a bit of concern but the management did point out that it was due to softening in H1FY2013 as customers tightening their inventory control. 

Fundamentally, I do not see any bad thing of Wellcall. Furthermore, it's from Ipoh. I must support a bit. HaHa. Perhaps, dividends may be more than 20 cents this year? Who knows