KUALA LUMPUR: Wellcall Holdings Bhd, the country’s largest exporter and producer of industrial rubber hoses, expects to increase its production capacity by 40% and profit margins to improve when its new factory is built, according to executive director Alex Chew.   

He said the factory will be built on a 3.3ha site 1km away from its existing factories in Kinta, Perak. On Wednesday, Wellcall entered into a sale and purchase agreement to acquire the land for about RM4.6 million.

“Our production utilisation rate is currently around 80%. The new factory will allow Wellcall to meet the rising demand for its products,” Chew told The Edge Financial Daily.

He said Wellcall should continue to see strong demand from multinational companies, particularly in Europe and North America, which outsource the production of their products to the company.  

“Wellcall is expecting the global outsourcing trend to continue as it has established a track record of being a reputable original equipment manufacturer,” he said.

According to Chew, construction of the new factory is expected to start at the end of the year and completed by 3Q13. Commercial production is expected to start end-2013, he added.

The factory will house production lines for its mandrel hoses, which command higher margins than the extrusion hoses, said Chew.

Wellcall plans to allocate about RM25 million in capital expenditure to cover the cost of the land, factory building and machinery, he said.   

“We are looking at taking a term loan to fund the factory and land amounting to about RM13 million,” said Chew.

The term loan will mark Wellcall’s first borrowing since its listing in 2006. As at end-March, Wellcall had cash reserves of RM39.4 million.

When asked how the loan would affect Wellcall’s dividends, Chew said: “Wellcall hopes to continue paying dividends at its existing payout ratio and will definitely continue to maintain its minimum payout of at least 50% of net profit.”

Wellcall paid dividends of 12 sen, representing 103% of its net profit, for FY11.

On the company’s outlook, Chew said lower rubber prices and the strengthening US dollar against the ringgit will bode well for Wellcall.

Rubber, which accounts for about 70% of Wellcall’s costs, has been trending downwards since peaking in 2011. The price of standard Malaysian rubber (SMR) 10 has come down from a peak of RM16.75 per kg in February 2011 to average around RM9.09 per kg this month.

The appreciation of the US dollar is favourable for Wellcall, as close to 98% of its sales are transacted in the greenback. From a low of RM2.90 in 2011, the US dollar has risen to about RM3.18 now.  

For its 2QFY12 ended March, Wellcall’s net profit jumped by 91% to RM5.52 million from RM2.89 million a year ago, while revenue increased 15.5% to RM37.34 million from RM32.34 million.

For FY11, Wellcall’s net profit gained 4.9% to RM15.33 million from RM14.62 million in FY10, while revenue increased 41.7% to RM136.83 million from RM96.56 million.

Wellcall closed at RM1.85 yesterday, rising 47% YTD.  

CIMB Investment Bank yesterday increased its target price for Wellcall to RM1.94 from RM1.83 previously.

This article appeared in The Edge Financial Daily, June 15, 2012.