Wellcall gets technology boost from Sweden’s Trelleborg

Manufacuring know-how: Wellcall managing director Huang Sha exchanging documents with Hagenberg after the signing ceremony. With them are Kai Lin (left) and executive director Leong Hon Chong.

INDUSTRIAL rubber hose manufacturer Wellcall Holdings Bhd charts another milestone when it inks a joint venture with Sweden’s Trelleborg Holding AB – a world leader in engineered polymer solutions provider.

This synergistic partnership will see Trelleborg transferring its technology and manufacturing know-how for the production of composite hose and fittings, enabling Wellcall to manufacture, market and distribute the hoses and expand its product offerings.

Currently, Wellcall produces extrusion, mandel, and spiral hoses in its three plants in Perak.

Industrial rubber hoses are used in construction, mining, automobile, oil and gas, marine, as well as the food and beverage industries.

Wellcall general manager Huang Kai Lin tells StarBizWeek that it is still preliminary for the group to provide a guidance on the sales volume of the composite hoses.

Wellcall is in discussions with Trelleborg for the target production capacity and product pricing.

“Our focus this year will be to set up the composite hose manufacturing plant, targeted for commissioning by end-2019, with two production lines and auxiliary equipment.

“Composite hose is lightweight, flexible, pressure and vacuum-resistant, mainly used in the transfer of petroleum and chemical.

“It is also a cost-effective hose, as it does not require curing like rubber hoses,” says Huang.

The composite hose manufacturing plant will be built within the vicinity of Wellcall’s existing plant.

The initial issued and paid-up capital of the joint venture (JV) company, Trelleborg Wellcall Sdn Bhd, is US$2.2mil (RM9.2mil).

Trelleborg will own 51% equity in the JV company, while Wellcall the remaining 49% equity.

Both parties will be jointly liable for their respective shares of funding for the JV company.

Wellcall intends to fund its share of equity participation of US$1.1mil (RM4.5mil) through internally generated funds.

As of Sept 30, 2018, Wellcall has a net cash position of RM37.2mil.

According to Trelleborg fluid handling solutions president Bill Hagenberg, the decision to partner Wellcall is due to its industry reputation, efficient manufacturing and firm presence in Malaysia.

“Trelleborg has a strong presence in Europe and the United States, but our presence in Asia is relatively limited.

“Hence, it is our ambition to grow our footprint in Asia and we hope this partnership becomes successful and a long-term fit,” he says.

Trelleborg is listed on Nasdaq Stockholm and has a market capitalisation of just above US$4bil.

For the financial year ended Sept30, 2018 (FY18), Wellcall posted a net profit of RM31.67mil, a 13% dip from the previous financial year due to higher cost of production resulting from the rising cost of material prices.

Despite the raw material price fluctuations, the group’s net profit margins remained at a healthy 18.5% on the back of a 7.5% growth in revenue due to the expanding global reach.

Wellcall’s raw materials such as natural rubber and synthetic rubber are subject to price fluctuations.

However, Huang forecasts raw material prices to remain stable over the next six months.

Wellcall’s return on capital employed and return on assets for FY18 stands at 29% and 24%, respectively, which are above industry norms of mid-teen figures.

This indicates that Wellcall operates on high efficiency levels.

More than 90% of Wellcall’s revenue is derived from the export markets, to over 70 countries worldwide.

Its largest export market is the United States and Canada, making up 25% of total group revenue in FY18, followed by Europe at 17%.

Going forward, Wellcall is keen on exploring new geographical regions such as Russia, eastern Europe and China, as well as growing revenue contribution from existing markets.

Over the past four years, Wellcall has grown its number of customers from 140 to 200.

“We are targeting to grow our sales in FY19 by 10% to 20%,” says Huang.

Currently, Wellcall has a production volume of 2.5 million to three million metres of hoses per month.

Inter-pacific Research is positive on Wellcall’s JV announcement and the new product line which will spices up Wellcall’s product portfolio.

The research house maintains its FY19 earnings per share (EPS) forecast of 7.14 sen for Wellcall, representing an earnings growth of 12.3%, as it continues to advocate Wellcall for its lean and efficient management that translates into higher margins, sustainable growth and attractive dividend yield of 5.5%.

Inter-pacific Research has a “neutral” call on the stock, with a target price of RM1.23.

Meanwhile, JP Morgan opines that the joint venture to produce composite hoses is a medium to longer-term positive.

“This remains a high return on invested capital or return on equity business with strong free cashflow yields of 5.5% to 7.3%, implying attractive dividend yields of 5.2% to 6% in FY19 to FY20.

“We see a potential earnings beat from higher-than-expected volume growth led by possibly higher oil prices,” says JP Morgan in a recent report on Wellcall.

For FY18, the 10% to 12% volume growth was partly driven by the oil and gas sector in US and Canada, a commendable growth, given the 20% year-on-year oil price decline in FY18, the research house said It adds that demand for rubber hoses remain intact and Wellcall is on track for more than 10% volume growth in FY19.

JP Morgan notes that there are potential headwinds facing Wellcall from the strengthening of the ringgit. It expects 2% net earnings erosion for every 1% appreciation in the ringgit. JP Morgan maintains its overweight call on Wellcall with a target price of RM1.70.