PETALING JAYA: The outlook for Wellcall Holdings Bhd clearly points to higher demand from its export clients, backed by higher production volume through better labour availability.
In a note to clients, this was the message from CGS-CIMB Research, which said it is turning more positive on the industrial rubber hose manufacturer and has upgraded the stock to an “add” call with a higher target price of RM1.46.
During Wellcall’s third quarter of financial year 2022 (3Q22) briefing recently, CGS-CIMB Research noted that the group indicated demand for its products remains robust with strong order visibility for five months, starting in September.
This is backed by a recovery in global demand for industrial hoses.
Given increasing industrial activities as well as an easing of the global shipping constraints due to a greater availability of shipping containers and lower freight rates, the outlook was positive, it added.
“We understand that Wellcall’s current sales run-rate is averaging 110 to 120 shipping containers per month, compared with an estimated 90 to 100 shipping containers in the first half of 2022 (1H22),” CGS-CIMB Research said.
To cater to the strong demand for its products, Wellcall also aims to grow its production volume.
The research house said the group expects its utilisation rate to average 75% from 4Q22 onwards, from an estimated 65% in 1H22, further backed by an improvement in labour availability.
In terms of margin expansion, CGS-CIMB Research expects Wellcall to post a strong margin expansion in 4Q22.
“This is on the back of tailwinds from the current operating environment, especially the weakening ringgit against the US dollar and a decline in key raw material prices,” it added.
Furthermore, CGS-CIMB Research is bullish on Wellcall’s move to raise selling prices since 2Q22 and 3Q22.
Wellcall is also expected to continue to benefit from higher economies of scale given the expected increase in production output, said CGS-CIMB Research.
At the end of 3Q22, Wellcall had a net cash position of RM59.5mil, or 12 sen per share.
“In our view, this will support a strong dividend payout ratio of 80% for FY22 to FY24, with dividend yields of 5.1% to 7%,” the research house said.
Across FY17 to FY21, Wellcall had a dividend payout ratio of 76%–102%, CGS-CIMB Research said.