WELLCAL (7231) - Wellcall Holdings - Forex gains from weaker Ringgit
Target RM2.15 (Stock Rating: HOLD)
At 123% of our annualised FY9/15 net profit forecast, Wellcall’s 1QFY9/15 net profit was above our expectation. This was due to forex gains from a weaker Ringgit and higher-than-expected profit margins on the back of low raw material prices. We raise our FY15-17 EPS forecasts by 15-21% to reflect higher EBITDA margins. This lifts our target price, still based on 15.9x CY16 P/E (10% discount to Hartalega’s target P/E). However, the stock is still a Hold as its valuation is not cheap but its dividend yield of above 5% should provide price support for the stock. We advise investors to switch to Karex, which offers stronger earnings growth prospects.
1QFY15 net profit up 42% yoy
1QFY15 revenue was up 25% yoy while net profit growth was stronger at 42%. We believe the higher EBITDA margin in 1QFY15 was mainly due to two factors: i) lower rubber raw material prices – e.g. average SMR20 raw material price in 1QFY15 was 500sen/kg compared to 740sen/kg in 1QFY15; and ii) weaker Ringgit against the US$ – forex gaUSin in 1QFY15 was RM1.2m. Generally, Wellcall benefits from profit margin expansion when raw material prices fall and vice versa. The company declared 2.3 sen interim DPS or 75% dividend payout ratio, in line with our expectation.
USA its largest export market
US became the company’s largest export market in 1QFY15. US sales expanded 116% yoy during the quarter to RM10m, and accounted for 23% of Wellcall’s total revenue. Sales in Asia, the company’s second largest export market, rose only 12% yoy to RM8m. Surprisingly, domestic sales dropped 24% yoy in 1Q15 to RM2.8m. This was a negative surprise but fortunately, domestic sales accounted for only 5-6% of overall group revenue.
New plant up in Aug 2015
Wellcall is building a new factory, slated for commercial production by Aug/Sep 2015. With the new factory, group mandrel hose production capacity will rise by 50% to 38,000 tonnes annually. If history is an indication, it could take the company 2-3 years to fill the new plant’s capacity. Wellcall’s balance sheet is healthy, with RM39m net cash or RM0.12 net cash per share as at end-Dec. To sustain its dividend payments, the company might need to borrow in the short-term to fund the estimated RM40m capex for its new plant.
Source: CIMB Daybreak - 27 February 2015
Target RM2.15 (Stock Rating: HOLD)
At 123% of our annualised FY9/15 net profit forecast, Wellcall’s 1QFY9/15 net profit was above our expectation. This was due to forex gains from a weaker Ringgit and higher-than-expected profit margins on the back of low raw material prices. We raise our FY15-17 EPS forecasts by 15-21% to reflect higher EBITDA margins. This lifts our target price, still based on 15.9x CY16 P/E (10% discount to Hartalega’s target P/E). However, the stock is still a Hold as its valuation is not cheap but its dividend yield of above 5% should provide price support for the stock. We advise investors to switch to Karex, which offers stronger earnings growth prospects.
1QFY15 net profit up 42% yoy
1QFY15 revenue was up 25% yoy while net profit growth was stronger at 42%. We believe the higher EBITDA margin in 1QFY15 was mainly due to two factors: i) lower rubber raw material prices – e.g. average SMR20 raw material price in 1QFY15 was 500sen/kg compared to 740sen/kg in 1QFY15; and ii) weaker Ringgit against the US$ – forex gaUSin in 1QFY15 was RM1.2m. Generally, Wellcall benefits from profit margin expansion when raw material prices fall and vice versa. The company declared 2.3 sen interim DPS or 75% dividend payout ratio, in line with our expectation.
USA its largest export market
US became the company’s largest export market in 1QFY15. US sales expanded 116% yoy during the quarter to RM10m, and accounted for 23% of Wellcall’s total revenue. Sales in Asia, the company’s second largest export market, rose only 12% yoy to RM8m. Surprisingly, domestic sales dropped 24% yoy in 1Q15 to RM2.8m. This was a negative surprise but fortunately, domestic sales accounted for only 5-6% of overall group revenue.
New plant up in Aug 2015
Wellcall is building a new factory, slated for commercial production by Aug/Sep 2015. With the new factory, group mandrel hose production capacity will rise by 50% to 38,000 tonnes annually. If history is an indication, it could take the company 2-3 years to fill the new plant’s capacity. Wellcall’s balance sheet is healthy, with RM39m net cash or RM0.12 net cash per share as at end-Dec. To sustain its dividend payments, the company might need to borrow in the short-term to fund the estimated RM40m capex for its new plant.
Source: CIMB Daybreak - 27 February 2015
