This article first appeared in The Edge Malaysia Weekly on February 26, 2024 - March 3, 2024

WITH solid earnings growth, good profit margins, a decent dividend yield, impressive share price performance, reasonable stock valuation and a healthy net cash position, original equipment manufacturer (OEM) rubber hose maker Wellcall Holdings Bhd seems to tick all the boxes for investors.

Thanks to the strengthening of global demand for industrial rubber hose, Wellcall achieved a record high revenue of RM217.2 million and net profit of RM55.2 million — an increase of 23% and 66% year on year (y-o-y) respectively — in the financial year ended Sept 30, 2023 (FY2023).

Its gross margin expanded to 40% in FY2023 from 32% in FY2022 while net margin improved to 25% in FY2023 from 19% in FY2022 as a result of lower operating costs and favourable raw material prices and exchange rate.

However, as Wellcall continues to navigate an uncertain economic landscape of rising inflation, currency fluctuations and supply chain volatility, the question is, can the Perak-based rubber hose maker maintain its momentum?

Despite the various challenges the company faced in FY2023, Wellcall co-founder and group managing director Huang Sha says it was a fruitful year for the country’s largest rubber hose manufacturer.

“Going forward, we hope to build on the momentum from FY2023. We aim to leverage our strong relationship with our customers and seize opportunities in the evolving landscape.

We also believe the growing electric vehicle sector and the rise of the solar industry will create a positive spillover for our order book in 2024,” Huang Sha tells The Edge in an interview at Wellcall’s headquarters in Pusing, a small town in the Kinta district.

Wellcall, which has been consistently paying dividends on a quarterly basis since August 2007, declared a total dividend per share of 8.2 sen for FY2023, an increase from seven sen for FY2022.

With a dividend policy of paying out at least 50% of net profit, Wellcall has cumulatively paid out about RM422 million since 2006.

A check on Bloomberg shows that the company, whose dividend payout ratio was 72% in FY2023, offered a 12-month dividend yield of 4.58% and that its indicated dividend yield is 4%.

Wellcall’s net cash had increased to RM74.4 million as at end-September 2023 from RM62.8 million a year ago. In fact, the company has been in a net cash position since its listing in 2006 and it has remained debt free since FY2018.

Huang Sha highlights the fact that Wellcall has a track record of more than two decades in rubber hose manufacturing. The group currently serves over 200 customers from more than 70 countries. “We have recorded an uninterrupted profit track record since listing and we have recurring customers who have been with us for more than 20 years. That gives us a strong customer retention rate of over 95%.

Moreover, our current order book is healthy with two to three months’ sales covered and growing order volume from customers. Around 80% of our demand comes from recurring orders from the replacement market as rubber hose generally only lasts three to 12 months, depending on the utilisation environment.”

Wellcall’s export markets include the US, Canada, Asia, the Middle East, Europe, Australia, New Zealand, South America and Africa. In FY2023, revenue from exports grew 25% y-o-y and contributed 92% to group revenue, driven by strong global market demand.

Huang Sha, who owns a 3.43% stake in Wellcall, says the company will be actively widening its customer base and exploring new geographical markets. The 68-year-old Taiwanese national and Malaysian permanent resident was appointed to the board in April 2006.

Non-executive director Tan Kang Seng is the sole substantial shareholder of Wellcall with equity interest of 11.58%, of which 11.24% is held through Maximum Perspective Sdn Bhd.

Kumpulan Wang Persaraan (Diperbadankan), the Employees Provident Fund, Public SmallCap Fund, Hong Leong Asia-Pacific Dividend Fund and Fortress Value Tactical Fund are among its top 30 shareholders.

Huang Sha points out that Wellcall’s institutional investor shareholding had gone up slightly to 44.8% as at end-2023 from 44.2% as at end-2022, and he believes the company’s strong fundamentals will continue to attract investor interest.

“We also see an increase in the number of shareholders, especially the retail portion, signalling positive interest from all types of investors, including retailers,” he says.

Over the past 12 months, Wellcall’s share price has risen 55% and it closed at RM1.79 last Friday, giving the company a market capitalisation of RM891.33 million. The counter is currently trading at a historical price-earnings ratio (PER) of 16 times.

Huang Kai Lin, alternate director to Huang Sha, says Wellcall has invested in new automated line expansion in Plant 3 to improve its production efficiency and technological capabilities.

“On average, the total capacity of our three plants is 2.8 million linear metres per month. We deliver about 120 containers of hoses per month,” says the 39-year-old, who is Huang Sha’s son.

Kai Lin says the line expansion in Plant 3, which cost about RM10 million, is anticipated to increase capacity by around 20% when it is completed by the middle of this year. “Our current factory utilisation rate is about 90% to 100%. After the 20% capacity expansion, we expect to fully utilise the new line. But of course, we need time to test out and all that so that we can assure stable quality of our products.”

He stresses that Wellcall’s business model remains focused as an original equipment manufacturing rubber hose distributor.

“Of course, we may establish our own brand if necessary. But for now, we continue with OEM to avoid any conflicts of interest with our customers,” Kai Lin says.

He adds that Wellcall’s specialisation in rubber hose manufacturing and high-mix, low-volume (HMLV) strategy has enabled the group to maintain its net profit margin and return on equity of more than 19% to 20% over the years.

Meanwhile, Huang Sha opines that the industry is supported by positive global demand for industrial hose. Citing Data Bridge Market Research, he sees global demand for industrial hose growing at a compound annual growth rate of 6.2% from 2023 to 2030.

“The main growth drivers of global demand are the oil and gas (O&G) industry, the growing adoption of hoses in the motor vehicle sector, enormous growth in the EV industry and strong demand growth coming from Asia-Pacific,” Huang Sha says.

In FY2023, about 50% of Wellcall’s turnover was derived from the O&G industry.

“We are optimistic about the prospects of our third production plant. With larger production capacity, we believe we can serve our customers better and penetrate new market segments that will contribute positively to the top and bottom lines of our company,” he says.

Nevertheless, he acknowledges that his key concerns are the cost fluctuation of Wellcall’s main raw materials and the global economic outlook. “Business is always fluid and we can never be complacent in order to consistently deliver our commitments to all our stakeholders.” 

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