AFTER a one-year delay caused by land issues, industrial hose manufacturer Wellcall Holdings Bhd’s third factory, its largest investment to-date, is going full steam ahead.
Piling works had commenced in end-June, putting phase 1 of Factory 3 on track for commissioning by April next year, the group’s co-founder and executive director Alex Chew Chee Chek tells StarBizWeek.
The new facility, located about 1km from Wellcall’s existing factories in Ipoh, is expected to at least double its mandrel hose production, the firm’s core product.
Phase 1 and 2 of Factory 3 will boost its total installed capacity by 70% to 56,100 tonnes from 33,000 tonnes currently. Phase 2 could be rolled out as early as six to eight months after phase 1 comes on stream, but this will depend on how quickly demand picks up for the additional capacity, according to Chew.
Wellcall, Malaysia’s largest exporter of industrial hoses, is mulling whether to include a spiral production line in Factory 3, which can manufacture much higher volumes compared with a mandrel line.
Wellcall makes rubber hoses for six major applications, namely air and water, oil and fuel, welding and gas, shipbuilding, automobile, and food and beverage.
Its products are exported to 60 countries across all continents, mostly to foreign distributors, which in turn supply to original equipment manufacturers.
In its previous financial year ended Sept 30, 2013 (FY13), exports made up 91% of the group’s turnover, with the bulk of it shipped to Asia. Domestic sales accounted for only 9%.
Wellcall sells two types of hoses: mandrel and extrusion. The latter are smaller-sized with a diameter of 5cm and below. Mandrel hoses are more lucrative for the group, whose gross profit margins range from 20% to 70% depending on product specification and geography, Chew says.
Even so, Wellcall does not plan to discontinue its extrusion lines as it is one of the few manufacturers in the world that allows clients to mix and match hoses in a single order, a niche service that has earned it a steady following.
While the global industrial hose market grows at a seemingly modest pace of 4%-5% a year, Wellcall is expanding to satisfy demand in Asia, and after production at its existing plants peaked in recent years.
Factory 2 is running on full capacity at 85%-90% since May, the first time it has done so since Wellcall was listed, says Chew. The mandrel lines at Factory 2 operate 24 hours a day.
“Most of our exports previously went to the United States, Europe and the Middle East, but Asia is now our largest market,” Chew quips.
He believes sales of hoses related to the mining and oil and gas industries will continue to be robust, citing the need for process equipment following an agreement between China and Russia that will see the latter sell piped gas to China.
Wellcall’s own performance has rebounded since the second half of FY13, helped by the economic recovery in the United States and Europe, plunging raw material prices and a stronger US dollar.
Chew says the current overproduction of natural rubber, Wellcall’s main raw material, from Cambodia and Vietnam looks set to last for seven years.
The market for synthetic rubber is also oversupplied. “For instance, the price of EPDM (ethylene propylene diene monomer M-class, a type of high-grade synthetic rubber) before this was stuck at US$4,000 (RM12,640) per tonne for a long time because there was a limited number of suppliers. It has dropped to US$2,800 (RM8,848) per tonne the last time I checked, and is still declining.”
Standard Malaysian Rubber 20 has tumbled 33% over the past year to RM5.20 per kg, Bloomberg data shows. The commodity averaged RM6.44 per kg during the period.
But given that close to 100% of Wellcall’s transactions are denominated in US dollars, the recent strengthening of the ringgit against the greenback does not bode well for the company.
Nonetheless, a stronger ringgit means Wellcall will be able to import synthetic rubber and chemicals more cheaply.
During the crisis years of 2008-2009, Wellcall was hit hard when some of its clients, spooked by the global financial meltdown, cancelled 50% of their orders overnight in November 2008.
“It was then that Wellcall realised it could no longer rely on manual labour and embarked on an overhaul of its processes,” Chew says.
Today the group operates on a fraction of the manpower it used to employ. In the past, four people managed one mandrel line, producing eight hoses per shift. Its new semi-automated mandrel lines, each manned by a single worker, can output up to 22 to 26 hoses per shift.
Wellcall spent RM4mil instead of RM32mil to install 32 mandrel production lines in Factory 2, Chew explains.
“We saved money by hiring a retired mechanical engineer to design and refurbish a semi-automated mandrel line.
“It was a risk for us as this was our longest line at 60m. The South Korean firm would have done it for a much pricier RM1mil per line.”
All this forms part of Wellcall’s stringent “cost down, value up” philosophy, according to Chew.
If it decides to go ahead with the spiral line, the group is likely to buy and refurbish an old line, which could cost less than half the price of a new machine, he adds.
Wellcall is set to see its cost base fall further in a couple of years once all its equipment is fully depreciated.
Its land cost is also one of the lowest in the industry at RM6.20 per sq ft, Chew points out.
Wellcall’s turnover and earnings per share have grown 10.73% and 12.57%, respectively, on a compounded annual basis, since FY09. Its operating margin in FY13 stood at 26.44%, the best in five years.
“The beauty of our business is that we don’t need to expand every year. Wellcall is a slow turtle,” quips Chew.
Yet its share price has been anything but. Shares of Wellcall gained 61% in the past one year to close at RM1.69 on Thursday. In August alone the counter has surged 10%.
At current levels, it trades at an indicative gross dividend yield of 3.55%, according to Bloomberg data.
Wellcall completed a 5-for-2 share split on March 21. It counts London-based Mondrian Investment Partners Ltd and a number of institutional funds as shareholders. Mondrian is its second-largest shareholder with a 9.83% stake, filings show.
They were probably attracted by Wellcall’s generous dividends.
Over the past five years it has returned almost 100% of its earnings to shareholders, with payouts exceeding 100% in some years.
This strategy is deliberate. “If we have no other use for the cash, we will share the windfall with shareholders,” says Chew.
For the six months to March, the group posted a 40% jump in net profit to RM14.24mil as revenue rose 11% to RM69.27mil.
It declared total dividends of four sen for the period, up 25% from a year ago, on earnings per share of 4.29 sen, or a 93% payout.
The company possesses a solid balance sheet with net cash of RM45mil as at end-March, or net cash per share of 13 sen. Wellcall is cash-rich because it insists on a 50% cash deposit upfront for all purchase orders, and up to 100% cash in riskier markets.
In the near-term, it expects to gear up to maintain its dividend payouts and fund the construction of Factory 3.
Although the total cost for Factory 3 has yet to be finalised, Wellcall is setting aside some RM41mil-RM45mil, inclusive of land acquisition, Chew points out.
The firm plans to secure an Islamic term loan of between RM18mil-RM20mil with a five-year tenure. It is also targeting to be syariah-compliant come the end of the year, when the Securities Commission updates its list of syariah-compliant stocks.
Wellcall will aim to keep the payback period for Factory 3 within three years. For comparison, it recouped its investment for Factory 2 in one year and eight months, Chew says.
Factory 3 will feature some 18 mandrel production lines in phase 1, but the final decision on the spiral line will be made once the group has weighed all the risks.
“The spiral line can be a double-edged sword. It is highly-efficient but needs to produce huge volumes to be economical,” Chew notes.
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