Why is Wellcall Holdings Berhad A Favourite Among Value Investors?

Wellcall Holdings Berhad (KLSE: WELLCAL) is the largest industrial rubber hose manufacture in Malaysia. As at 17 January 2020, the Group has a market capitalisation of approximately RM537.8 million. In this article, we will take a closer look at the business, management and financial aspects of the Group, to see if it is worth an investment.

Business Overview

Wellcall’s history dates back to the mid-1990s when its Managing Director, Mr. Huang Sha, established Wellcall Hose (M) Sdn Bhd (“WHSB”) together with two other founders, Mr. Leong Hon Chong and Mr. Lin Kun Pao, to engage in the business of manufacturing rubber hose for customers who are mainly in the business of distributing rubber hose to original equipment manufacturers (“OEM”). WHSB was then principally involved in the manufacture and sale of air and water hose, oil hose and welding hose, and focused its marketing efforts in Europe, USA and Canada.

Since then, Wellcall has grown into a manufacturer of rubber hoses for six major application markets including air and water, welding and gas, oil and fuel, automobile, ship building, and food and beverage. Owing to its research and development initiatives, the Group is able to manufacture a wide range of high quality rubber hoses through the mandrel or extruded process.

The Group now has a global presence and can count customers from Malaysia, the Middle East, Europe, USA/ Canada, Australia / New Zealand, Asia, South America and Africa. The chart below shows the composition of Wellcall’s revenue from external customers for financial year (“FY”) 2014 to FY2018.

In January 2019, Wellcall entered a joint venture agreement with Trelleborg AB, a Swedish polymer engineering solutions provider, to set up Trelleborg Wellcall Sdn Bhd to manufacture and sell composite hoses and fittings.

Composite hoses are different from Wellcall’s existing rubber-based hoses as composite hoses contain multiple layers of plastics. These hoses are mainly used to transfer petroleum and chemical productions during the ship-to-shore and road-to-rail-tanker transfer.

Trelleborg AB will own 51% of the said joint venture, and Wellcall the remaining 49%. The partnership is a milestone for Wellcall as it ventures into a new business segment. Wellcall will benefit from the technology and knowledge transfer, and will fund its stake in the joint venture through internally-generated funds.

Management

Wellcall’s key management are as follows:

Huang Sha (63, Taiwanese, Malaysian Permanent Resident) Group Non-Independent Managing Director	Co-founder of WHSB.Appointed to the Board of Wellcall on 17 April 2006 and was appointed as Managing Director at the same date.Over 40 years of experience in the manufacturing of rubber houses and is currently responsible for the strategic planning and development of the Group. Owns 3.40% direct interest and 0.15% indirect interest in the Group.
Leong Hon Chong (73, Malaysian) Non-Independent Executive Director	Graduated from the University of Otago in New Zealand with a Bachelor of Commerce (Accountancy) in 1970.Co-founder of WHSB. Responsible for the administration and marketing functions of the Group. Owns 1.08% direct interest in the Group.
Huang Yu Fen (39, Taiwanese, Malaysian Permanent Resident) Non-Independent Executive Director	Daughter of Huang Sha and sister of Huang Kai Lin.Graduated from Stamford College, Malaysia with a Diploma in Accounting in 1999. Upon graduation, she joined WHSB as a Marketing Executive assisting in sales and marketing functions and later promoted to Assistant Marketing Manager, and later on Business Development Manager.  She was appointed to the Board of Wellcall on 23 May 2018. Her current position is Manager to the Group Managing Director office.Owns 0.11% direct interest in the Group.
Huang Kai Lin (34, Taiwanese, Malaysian Permanent Resident) Alternate Director to Leong Hon Chong	Son of Huang Sha and brother of Huang Yu Fen.Graduated from National Taiwan University, Taiwan with a Bachelor of Chemical Engineering in 2008. He has several years of working experience in the rubber product industry and later joined as an engineer, in the research and development department of WHSB and later promoted as General Manager overseeing the operations of Group. Appointed to the Board of Wellcall on 12 April 2010.  Owns 0.44% indirect interest in Group.
Tan Kang Seng (51, Malaysian) Non-Independent Non-Executive Director	Appointed to the Board of Wellcall on 17 April 2006. He is also a Non-Executive Director of WHSB.Mr. Tan has wide ranging interests in property, hospitality and financial technology business in Malaysia and overseas. He is also an active investor in food and beverages industries. Owns 0.34% direct interest and 11.03% indirect interest in the Group.

All the above-mentioned directors have vested interest in the Group and are likely to be motivated to ensure the business’ continued success. Interestingly, the cumulative interest of Wellcall’s founders (Mr. Huang Sha and Mr. Leong Hong Chong) as well as Mr. Huang Sha’s children is less than Mr. Tan Kang Seng’s (a Non-Executive director) stake in the Group.

Major Shareholders

We extracted the following list of top 20 shareholders from the Wellcall’s 2018 annual report (as at 21 December 2018). Note that the Group’s 2019 annual report has not been published, so a more current listing is not yet available.

Cumulatively, the top 20 shareholders own 59.60% of Wellcall’s shares. The presence of a number of institutional funds as shareholders provides a likely indicator that the Group is a generous dividend payer.

Financials 

Measure 1: Growth in revenue and profits

The Group has seen low growth in revenue of 3.05% and profit after tax of 4.52% over the past 6 years. We understand from the annual reports that management is seeing softening of demand resulted from slower recovery of global demand for industrial rubber hose.

Measure 2: Profitability

Wellcall enjoys decent gross margins, net profit margins and return on equity ratios. While there is no clear evidence of pricing power for its products, at the very least management is competent in managing costs and resource allocation.

Measure 3: Liquidity

Wellcall has a conservatively managed balance sheet as it has recorded favourable current, cash and net gearing ratios for the past 6 years. In fact, the Group has cash and cash equivalents of approximately RM52.8m as at 30 September 2019 and zero borrowings.

Round 4: Dividends payout

Wellcall has been consistently paying out dividends every year, well in excess of its dividend policy to allocate at least of 50% of profits as dividends. Due to its generous dividend payout, many investors view the Group as an “income stock”.

The Group does not require high capital expenditure to operate and maintain its business and generates ample of free cash flow each year. In view of this, the sustainability of such high dividend payouts should not be a concern.    

Conclusion

With a closing share price of RM1.08 as at 17 January 2020, Wellcall is trading at a price of earnings (PE) ratio of 14.61, with an indicative yield of 5.23%. While growth prospects for the Group are not forthcoming, investors can seek comfort from the steady dividend distributions.

Source: Google Finance

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