Wednesday, September 7, 2011

WellCall ... Sep11

With volatile rubber prices and the weakening US dollar, many companies in the rubber sector have seen lower profits since the beginning of 2010. However, Wellcall Holdings Bhd, the largest exporter of industrial rubber hoses in Malaysia, is one of the few that bucked the trend with its latest quarterly report.
Wellcall posted a 38.34% year-on-year rise in net profit to RM4.86 million for 3QFY11 ended June 30 from RM3.51 million a year ago. Revenue increased by a larger margin of 50.8% to RM38.11 million from RM25.27 million previously. Basic earnings per share (EPS) for the quarter was 3.68 sen compared with 2.66 sen a year ago.

The better quarterly results were also due to the improved utilisation of its production lines and the gradual increase in the selling price of its products. The increase in raw material prices gave Wellcall room to raise selling prices.

Wellcall actually favours the upward increase in raw material prices, but it has to be a gradual and not a drastic increase.

Like other manufacturers, Wellcall has been facing rising raw material costs, in particular synthetic rubber and standard Malaysian rubber (SMR). The stronger ringgit is another headwind as 98% of Wellcall’s transactions are done in US dollars, but it also reduces the cost of imported synthetic rubber and chemicals.

To counter the effects of rising raw material costs and the strengthening ringgit, apart from pricing up its products, Wellcall has improved efficiency by transforming its manufacturing process. Wellcall has been improving its efficiency in the manufacturing process by converting older manual machines to semi-automated ones. This exercise is an ongoing programme to cut labour costs. In certain divisions, Wellcall has managed to reduce the workforce by up to 40%.

To buffer against volatitile raw material prices, Wellcall purchases its materials in bulk. Wellcall has in stock one month’s worth of natural rubber and two to three months of synthetic rubber. Wellcall also has the flexibility to switch between natural and synthetic rubber, giving it room to minimise raw material costs.

Wellcall’s products are sold to distributors and end customers in major application markets. These include the air and water hose, welding and gas, oil and fuel, automobile, ship building, and the food and beverage (F&B) markets.

Unlike rubber glove companies that cater for the mass market, Wellcall produces more for the niche markets, especially in the oil and gas (O&G) sector. Wellcall’s products are tailor-made and meant for the niche segment. So it is easier to pass cost increases to customers.

Wellcall has been focusing on high-value products in the F&B, O&G and mining sectors, riding on the commodity trend and increased mining activities in gold, iron and oil.

With 90% of its revenue derived from foreign markets, Wellcall exports to more than 60 countries. For the nine months ended June 30, 23.4% of sales were from Asia, followed by the Middle East (19.9%), Europe (16.3%), USA/Canada (14.9%), Australia/New Zealand (9.6%), South America (12.3%) and Africa (3.6%). Malaysia only contributed 8.3% of sales. Wellcall is expanding its customer base in places such as Africa, Russia and Latin America.

Wellcall’s revenue of RM99.6 million for 9MFY11 has already equalised its FY10 annual revenue of RM96.6 million. It is 45.6% higher than revenue from the same period last year.

Operational profit from its export and local markets increased by 33.78% and 19.04% respectively, from the same period last year.

Net profit for the nine-month period, however, was marginally lower at RM10.78 million, or 8.17 sen per share, down 2.7% from RM11.08 million a year earlier.

Wellcall has been debt free since its listing in 2006. As at end-June 2011, its balance sheet remained healthy with cash reserves of RM36.48 million.

Industrial hoses last from five weeks to eight months before they are replaced. Because of this, 85% to 90% of Wellcall’s sales come from the replacement market. Because of the continuous demand for hoses in new and old machinery, one could say Wellcall enjoys a “compounding” demand for its products in the future.

Over the past five years, Wellcall’s net profit rose from RM10.88 million in FY06 to a high of RM17.11 million in FY08, before declining to RM13.34 million in FY09 and then rising to RM14.62 million in FY10.

Its net assets per share stood at 59 sen as at June 30 2011.

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