It had on Wednesday raised its target price from RM1.28 to RM1.56 as it narrowed the discount to its target P/E of 22 times for Kossan from 30% to 20%.
“The lower discount is to reflect potential earnings from the JV over the next few years. The stock remains an Add with declines in raw material prices and strong earnings from the JV as potential rerating catalysts, while a rise in raw material prices is a key downside risk,” it said in a research note.
To recap, Wellcall announced it has set up a 49:51 JV company with Trelleborg Holdings AB (THAB), to produce composite hoses. The JV’s initial paid-up capital is US$2.2mil (RM9mil).
THAB produces composite hoses and engineered polymer solutions that seal, damp and protect critical applications. The Swedish company does not have a manufacturing presence in Asean.
“This news was a positive surprise to us as THAB is one of the major global players in Europe that produce composite hoses. The JV could be a major revenue contributor to Wellcall over the next few years.
THAB will provide the technological know-how while Wellcall will handle the manufacturing and marketing of the composite hoses in the region.
As at end-September, Wellcall had RM37.2mil net cash, or 7.5 sen net cash per share. Wellcall will fund paid-up capital for the JV, which is US$1.1mil (RM4.5mil), from internal funds.
The JV will first set up two production lines, and the factory should be ready by end-2019F.