Success Business Fund

Wellcall Holdings Bhd may not be on the radar screens of most investors but it is undoubtedly still a gem among small market-capitalized companies. The industrial rubber hose maker has a strong balance sheet and dishes out consistent dividend payments. Judging from the recovery in its purchase orders in the last few months as well as the general upbeat prospects of the rubber products industry, Wellcall is slated for brighter days ahead. Some industry observers reckon that Wellcall could very well be the next TopGlove, a “honey” of the rubber products industry.

Wellcall is the largest exporter of rubber hoses and tubes in Malaysia. It began 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. The group started off manufacturing and selling rubber hoses to three major application markets and has since expanded to more than six major application markets, which include the air and water, welding and gas, oil and fuel, automobile, ship building, and food and beverage industries.

It uses two different processes to manufacture rubber hoses — the extrusion method, to produce hoses with a diameter of less than two inches; and the mandrel method, where rubber sheets are wrapped around a mandrel to make hoses larger than two inches in diameter. At present, Wellcall has 32 mandrel and 16 extrusion lines.

Though the market for industrial hoses is mature and registering a paltry annual growth of 4% to 5%, 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.

It has its own proprietary design and fabricates its own mandrel production lines at about a quarter the cost of acquiring the machines from third parties. That, coupled with its low-cost base in Perak, has allowed Wellcall to be more aggressive in pricing and in turn capture market share from less efficient producers. Wellcall exports more than 90% of its products to 60 countries. According to its quarterly report for the third quarter ended June 30, 2009 (Q309), the Middle East is its largest market by geographical breakdown, accounting for 23.68% of its revenue, followed by Europe (22.39%), Asia (20.42%), the United States/Canada (16.29%), Australia/New Zealand (8.46%), South America (6.00%) and Africa (2.76%). The local market accounted for 6.35% of its revenue and 7.15% of its pre-tax profit.

During the last Asian financial crisis, Wellcall had continued to register sales growth and even expanded production as the devaluation of the Ringgit improved the competitiveness of its products.

This time around, the Ringgit was not as ‘competitive’. The contraction in demand for its products saw Wellcall register what may probably be its first decline in revenue — or at least its first since listing. In its Q209 ended March 31, Wellcall posted RM16.12 million in revenue and RM2.16 million in net profit, a reduction of 39.11% and 44.35% from the previous corresponding period. Q3 saw a slight revenue recovery over Q2 but compared to Q3FYo8, revenue had dropped by 44.25% to RM16.63 million. Pre-tax profit, however, saw only an 18.84% decline, due to lower raw material costs and favorable foreign exchange gains.

In its filing to Bursa Malaysia, Wellcall said: “Given the financial performance of the Group for the first nine months of the financial year, the Board anticipates a satisfactory performance for the year given the challenging economic environment.”

Due to their heavy usage, industrial hoses typically have short lifespan and last anywhere between one week to nine months before they need to be replaced. Even if a customer does not acquire new machinery, industrial hoses used in existing machinery still need to be replaced regularly. The global slowdown in economic activity may have lengthened the replacement cycle but replacements would still be needed in the future. The replacement market accounts for over 8o% of Wellcall’s sales and would serve as a buffer.

“From our recent visit, we gathered that orders have picked up over the past two to three months, particularly from the mining sector and the Middle East. Pro-Spects are promising given the recovery of the global economy,’ according to a CIMB Research note published mid last month.

“The replacement nature of Wellcall’s business should help return demand to normalcy once distributors finish destocking,” echoed Choong Khuat Hock, head of stock research of fund management firm Kumpulan Sentiasa Cemerlang Sdn Bhd in his report.

Choong opined that with its prudent management and strong balance sheet, the economic crisis has also opened the window for Wellcall 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,” he said.

CIMB likewise notes that a number of foreign and local hose makers, some of which are Wellcall’s rivals, have shut down since the beginning of the year 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,’ CIMB adds.

Wellcall is debt-free; and cash-rich to boot. At end June 2009, it had RM40.5 million in its kitty. It also has a dividend policy of distributing a minimum of 50% of its net profit annually to its shareholders.

Its dividend yield of over 7% looks attractive, especially when paraded alongside the average 3.9% from rubber glove makers listed on Bursa.