Wellcall Holdings Bhd specialises in the manufacture of industrial rubber hoses and is now the largest exporter of rubber hoses and tubes in Malaysia. It started operations at its sole plant in Kinta, Perak, back in 1996. It was listed on the Second Board of Bursa Malaysia in July 2006 and was subsequently transferred to the Main Board in March last year.
Wellcall’s managing director, Huang Sha, has more than 30 years of experience under his belt and has gone through two major recessions.
The company uses two different processes to manufacture the rubber hoses. The extrusion method is used to produce hoses with a diameter of less than two inches. In this process, unvulcanised rubber is forced through a die to form hoses of the desired shape and size. As for hoses exceeding two inches in diameter, these are made by wrapping rubber sheets around a mandrel (solid cylinder made of metal).
Wellcall has the flexibility to switch between natural rubber and synthetic rubber, giving it room to minimise its raw material costs. It is one of only seven companies in the world of its size with such flexibility.
At present, Wellcall has 32 mandrel and 16 extrusion lines. It operates on two shifts daily but could improve capacity utilisation by implementing three shifts per day. Its products are sold mainly to distributors and end customers from a diverse range of industries, comprising air and water, oil and fuel, welding and gas, automobile, shipbuilding and food and beverage. Its customer base is wide geographically, with Asia accounting for 25% of its sales last year, followed by the Middle East (22%), Europe (21%), North America (15%), Australia/New Zealand (8%), South America (6%) and Africa (3%). Malaysia only accounts for 6.3% of sales.
Similar to rubber glove manufacturers, Wellcall’s location in a natural rubber-producing region and proximity to petrochemical plants (source for synthetic rubber) enable it to enjoy logistical benefits in procuring raw materials. It also enjoys lower labour and land costs owing to the location of its plant in Perak. One of Wellcall’s biggest advantages is that it can invest cheaply in new equipment, unlike most of its peers.
Wellcall has its own proprietary design and fabricates its own mandrel production lines, with a payback period of two to three years. The machines are semi-automated, reducing labour requirements from four operators to one, and are able to generate a higher output of 14 to 18 hoses per shift (eight hoses per day before). Although the technology in use is superior to what is available in the market, the cost of fabrication is only about a quarter of the cost of buying a machine from third parties.
With lower investment requirements, Wellcall is able to achieve a high asset turnover, which is one of the main factors that contribute to its ability to achieve high returns on equity (25.2% and 24.3% for FY2007 and FY2008 respectively).
Industrial hoses wear out quickly due to their heavy usage and typically have short lifespans, lasting around one week to nine months, before they need to be replaced. The replacement market contributes about 80% to 90% of Wellcall’s sales. The company continued to register sales growth and even expanded production during the 1997/98 Asian financial crisis as the devaluation of the ringgit improved the competitiveness of its products. However, the company is not immune to a slowdown in economic activity, which may lengthen the replacement cycle for its products.
The market for industrial hoses is mature and achieving a meagre growth of 4% to 5% a year. However, Wellcall has been able to buck the trend, achieving an impressive compound annual growth rate of 33% and 25% in revenue and net income respectively from 2006 to 2008. Its low-cost base has allowed it to be more aggressive in pricing and in turn capture market share from inefficient producers. Some have desperately resorted to dumping recently but despite lower prices, Wellcall is still able to maintain positive margins.
With its prudent management and strong balance sheet, the economic crisis has opened the window for the company to gain a larger slice of the pie. Most of its competitors had geared up heavily before the crisis and are now reeling as a result, with some on the brink of collapse.
Wellcall’s latest quarterly results (1QFY2009) however showed a 24.8% quarter-on-quarter decline in revenue and only a slight 3.6% y-o-y increase. Net profit fell 27.8% q-o-q and 7.7% y-o-y to RM3.6 million due to an inventory writedown. Its results were impacted not only by the severity of the current crisis but also by a fall in commodity prices, which resulted in lower inventory values.
The price of smoked Malaysian rubber (SMR) 10 rose from RM6 per kg in January 2007 to peak at RM10.50 in July last year. Selling prices thus had to be raised to compensate for the higher raw material costs. The bubble also encouraged Wellcall’s distributors to stock up in anticipation of even higher prices, leading to above-normal demand in mid-2008.
SMR 10 prices then collapsed to a low of RM4 per kg in December last year, leaving distributors stuck with excess inventory. We believe that the poor results will persist in 2QFY2009 given the weak global market. However, the replacement nature of its business should help return demand to normalcy once distributors finish destocking.
At a FY2009E price-earnings ratio of 7.8 times, Wellcall’s valuation appears undemanding. It has cash holdings amounting to 23.2 sen per share and no gearing. Results over the next few quarters may be impacted by weak global demand but we believe the company’s long-term prospects remain good and that it is well positioned to continue to capture market share with its strong balance sheet and low-cost advantage.
Wellcall’s dividend yield of 7.4% also looks attractive while its net cash position of RM30 million will enable it to maintain dividend payments.
Choong Khuat Hock is head of stock research and a partner at Kumpulan Sentiasa Cemerlang Sdn Bhd, a fund management company. KSC may own shares in some of the companies covered by the writer.
This article appeared in The Edge Malaysia, Issue 751, April 20-26, 2009