Wednesday, February 9, 2011

WellCal ... Feb11

The market is speculating whether WellCall will earmarked all its earnings as dividends this financial year ending Sept 30. Investors are expecting the cash rich, debt free industrial hose manufacturer to have money to spare to reward shareholders if the company does not reinvest its earnings to expand its production capacity.

However, its executive director said that the payout ratio will depend on the global economic landscape and how it affects the firm’s business plans in the coming months (Feb 2011 & Beyond). The expansion of WellCall’s production capacity will be justified if its factory utilization rate reaches pre crisis levels of about 90%. Its existing usage is about 80%.
By looking at the current utilization trend, the company may have to consider expanding its output capacity in the second half of 2011. The company is still assessing where the expansion should take place.

It is claiming that it is Malaysia’s largest industrial rubber hose manufacturer, catering for industries such as oil and gas, automobile, mining and f&B.

The company will release its first financials in Feb 2011. This comes on the backdrop of costlier natural and synthetic rubber, the company’s primary raw materials.

Its net profit for 4QFY2010 fell owning to higher raw material prices and staff expenses. It also had to contend with a stronger ringgit against the US dollar during the period.

Its raw material inventory is adjusted according to market conditions.

As WellCall derives about 92% of its revenue from exports, of which 98% is transacted in the US dollar, a stronger ringgit against the greenback does not bode well for the company as income will be less when converted into the local currency.

The company mitigates the impact of a firmer ringgit by selling its products at a base exchange rate of 2.90 before converting its overseas back to the ringgit at 3.05, ensuring a translation gain for the company.

A stronger ringgit, however, translates into cheaper imports of synthetic rubber and chemicals for the company, which pays for the items in the US dollar. Natural rubber is purchased in ringgit.

Going forward, industry observers say demand for WellCall’s products could be affected as raw material prices rise. This is because customers may delay purchases as they do not want to caught holding costlier inventory that will not be economically viable if commodity prices go down later.

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