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AnalysisMalaysia

7 things I learned from the 2019 Wellcall AGM

Established in 1996, Wellcall manufactures rubber hoses for six major application markets including air and water, welding and gas, oil and fuel, automobile, shipbuilding, and food and beverage. Owing to its research and development initiatives, Wellcall is able to manufacture a wide range of high-quality rubber hoses through the mandrel or extruded process. The company has a global presence and can count customers from the Middle East, Europe, USA, Canada, Australia, New Zealand, Asia, Russia, Africa and South America.

In the past 12 years, Wellcall has demonstrated a notable financial track record with an average ROE of 23.3%. It has also maintained consistent gross profit and net profit margins since it listed in 2006. I wanted to know more about the company and took a two-hour drive to Malacca to attend its annual general meeting.

Here are seven things I learned from the 2019 Wellcall AGM:

1. Revenue rose 7.5% year-on-year to RM171.1 million in 2018. Over the last 12 years, Wellcall’s revenue has grown at an annualised rate of 14.9%.

Source: Wellcall annual reports

Domestic and export markets accounted for 11.3% and 88.7% of Wellcall’s 2018 revenue respectively. Geographically, the U.S. and Canada are the top revenue contributors at 25.5% of total revenue.

Source: Wellcall annual reports

2. Net profit slipped 13.9% year-on-year to RM28.4 million in 2018. The management attributed the decline in net profit to rising production costs as raw material prices increased. During a break, a director explained to some shareholders that most of the Malaysia’s natural rubber for domestic consumption was used up by the rubber glove industry. As a result, Wellcall imports its rubber instead. Over the past 12 years, Wellcall’s net profit has grown at an annualised rate of 14.8%.

Source: Wellcall annual reports

3. As at 30 September 2018, Wellcall has zero debt. The company fully repaid its RM8.4 million term loan in 2018.

4. A shareholder asked about the proportion of Wellcall’s production output between its mandrel and extruded hoses. The board answered that the output of extruded hoses is 10 times more than that of mandrel hoses at the moment. Each type of hose accounts for about half of Wellcall’s revenue. The board also added that Wellcall’s factory is operating at full capacity except for two production lines that are put on hold temporarily for machinery upgrades.

5. When the same shareholder asked if Wellcall could share some of the names of their competitors, the board chose not to disclose. The board thinks Wellcall’s core strengths lie with its research and development capabilities, innovation, and continuous quality enhancement to improve its production.

6. In January 2019, Wellcall entered a joint venture agreement with Trelleborg AB, a Swedish polymer engineering solutions provider, to set up Trelleborg Wellcall Sdn Bhd to manufacture and sell composite hoses and fittings. A shareholder was interested to know more about the characteristics of composite hose materials and how the approximately RM9.2 million venture would contribute to Wellcall. The board shared that a composite hose is a lightweight, flexible hose that can withstand vacuum pressure. It is mainly used to transfer petroleum and chemical products during the ship-to-shore and road-to-rail-tanker transfer. Composite hoses are different from Wellcall’s existing rubber-based hoses as the composite hoses contain multiple layers of plastics. The partnership is a milestone for Wellcall as it ventures into a new business segment. Wellcall will benefit from the technology and knowledge transfer, and its financials are expected to improve in the near term. Wellcall will fund its 49% equity in the joint venture through internally-generated funds.

7. A shareholder also enquired about the marketability of the composite hoses. Financial controller Yu Tat Keong shared that the composite hoses will be marketed in Asia with a particular focus on the ASEAN market. Trelleborg Holding AB has a business presence in Europe and wants to expand to Asia — where there is demand for composite hoses — with a strong local partner like Wellcall.

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Shak Chee Hoi

Chee Hoi is an investor and research analyst at The Fifth Person. He was previously involved in wildlife conservation work with a non-governmental organisation as well as sustainability consultancy work. He personally believes in impacting society and the environment for the greater good.

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