Not many investors look at Wellcall Holdings Bhd when it comes to stock picking. However, judging from the signs of recovery in its purchase orders, its strong balance sheet and consistent dividend payments, the industrial rubber hose maker could be a hidden gem in the manufacturing sector, which has been battered by the economic downturn.
Wellcall’s healthy balance sheet, especially its net cash position, would appeal to cautious investors during the current economic slowdown. Being cash-rich puts the company in a better position to ride out the storm than its highly geared rivals.
Having said that, cash-filled coffers alone do not guarantee a company’s survival if the crisis is prolonged. Luckily for Wellcall, it still sees steady demand for its products.
In a note commenting on Wellcall’s results for 1QFY2009 ended Dec 31, 2008, Inter-Pacific Research says the rubber hose maker is bracing for a tough year in 2009 because some 90% of its revenue is derived from exports.
However, says the research firm, if Wellcall’s 1QFY2009 results are any indication, demand for the company’s products is holding. Furthermore, it points out, Wellcall’s net cash position of about RM30 million or 23 sen per share (its share price closed at 89.5 sen last Thursday) will help it to “swim through well equipped”.
Wellcall recorded a lower pre-tax profit of RM3.88 million for 1QFY2009 against RM4.26 million a year ago. Its earnings per share (EPS) came in at 2.76 sen compared with 3.01 sen in the previous corresponding period. Revenue was marginally higher at RM26.4 million versus RM25.5 million in the previous corresponding quarter.
For FY2008 ended Sept 30, the company posted a record pre-tax profit of RM18.8 million versus RM16.6 million in FY2007. Revenue came in at RM119 million compared with RM91.39 million a year ago. EPS grew to 13.33 sen from 12.07 sen.
Wellcall has managed to grow its revenue and earnings since 2004. The company migrated to the Main Board of Bursa Malaysia in March last year after completing a one-for-two bonus issue that raised its paid-up capital from RM41.7 million to RM63.9 million.
The company has been enjoying a decent net profit margin of about 15% in the past two years, even as prices of raw materials, namely natural rubber and synthetic rubber, were on the rise. To a large extent, it has managed to pass on the increment in cost to its clients.
Its impressive earnings growth track record aside, Wellcall’s share price has tumbled from its peak of RM2.25 in February 2007 to a low of 79 sen.
Nonetheless, CIMB Research believes that Wellcall’s current share price of around 90 sen has already factored in most of the negative news.
“The worst is probably reflected in Wellcall’s share price. Ex-cash, the stock is trading at only 4.5 times price-earnings ratio,” CIMB comments
According to the research outfit, Wellcall’s management has actually seen the current demand situation improve since the slowdown it experienced in September last year, when the company began to feel the full impact of the global economic crisis.
“Since March, customers have placed new orders probably because they have run down their inventories. Although the orders are small, they could pick up over the next few months on signs of a recovery in the global economy,” says CIMB in a note.
According to the research house, industrial hoses, on average, last about six to seven months. “Even if a customer does not acquire new machinery, industrial hoses used in existing machinery still need to be replaced on a regular basis,” it says.
Under the circumstances, the replacement market would serve as a buffer for Wellcall even though there is a slowdown in new industrial activity.
Also, CIMB observes that a number of foreign and local hose makers, some of which are Wellcall’s rivals, have shut down in the past few months due to the sharp contraction in demand in 4Q2008. While this paints a bleak picture for the industry, Wellcall, which has financial muscle, will face less competition in securing new customers.
It is also worth noting that Wellcall has been generous in declaring dividends. Based on its share price of 85 sen, CIMB says the company’s gross dividend yield is attractive at 10.7% compared with 3.9% for the rubber glove makers listed on Bursa Malaysia.
This article appeared in The Edge Malaysia, Issue 750, April 13-19, 2009