Wellcall Holdings Berhad - Earnings growth impacted by weaker demand
Thu, 29-Aug-2024 07:26 am
by Kenneth Leong • Apex Research

Counter

WELLCAL (7231)

Target Price (RM)

1.90

Recommendation

Buy

Summary

WELLCAL’s 3QFY24 core net profit slipped -23.4% yoy, but rose +15.3% qoq to RM13.6m, bringing 9MFY24 core net profit at RM39.1m (+1.2% yoy) came slightly below expectations, amounting to 69.5% of in-house and 70.2% of consensus expectations.

Trimmed our earnings forecast by -5.0%/-4.8%/-4.5% to RM53.6m/RM55.6m/RM59.8m for FY24F/FY25F/FY26F respectively, adjusted to the softer demand as well as higher raw material prices.

Re-iterate our BUY recommendation on WELLCAL with a lower target price of RM1.90, by pegging 17.0x P/E multiple to rolled-over FY25F EPS of 11.2 sen. 

 

Results Review

  • Results review. 3QFY24 core net profit slipped -23.4% yoy, but rose +15.3% qoq to RM13.6m, as the weaker yoy performance was impacted by softer rubber hose demand from global markets. Revenue for the quarter stood at RM51.2m (-8.8% yoy and +4.4% qoq). A third single tier interim dividend of 2.0 sen per share, payable on 25 September 2024 was declared.

  • Below expectations. 9MFY24 core net profit at RM39.1m (+1.2% yoy) accounted to 69.5% of our core net profit forecast at RM56.2m and was at 70.2% of consensus forecasted net profit of RM57.8m. The variance is mainly stemmed from the softer-than-expected demand.

  • Operations Highlights. In 3QFY24, export market remains as the biggest contributor at RM45.6m (89.0% of total revenue), while local market makes up to the remainder at RM5.7m (11.0% of total revenue). Meanwhile, cash level remains healthy at RM77.5m vs. RM73.8m in 2QFY24.

  • Industry Highlights. Nitrile price ticked higher in recent months and we expect prices to march higher due to disruption in feedstock supply (August 2024 price at US$0.97/kg vs US$0.75/kg in August 2023). Meanwhile, natural rubber price also trended higher to US$1.41/kg in August 2024 (+25.9% yoy) as demand picks up.

  • Outlook. We gather that expansion plans remain on track for Plant 3 that is schedule for completion by September 2024. Deferred orders stemmed from the Red Sea crisis is expected to normalise in subsequent quarters. Still, we opine that net margins are expected remain below the 30% threshold amid the higher raw material prices.

  • Valuation. Given that the reported earnings came slightly below expectations, we trimmed our earnings forecast by -5.0%/-4.8%/-4.5% to RM53.6m/RM55.6m/RM59.8m for FY24F/FY25F/FY26F respectively, adjusted to the softer demand as well as higher raw material prices. Nevertheless, we re-iterate our BUY recommendation on WELLCAL with a lower target price of RM1.90, by pegging 17.0x P/E multiple to rolled-over FY25F EPS of 11.2 sen. 

  • Risk. Fluctuation in raw material prices (rubber price). Exposure to foreign exchange risk given that majority of the sales are denominated in USD. Slower-than-expected plant expansion may dampen earnings growth prospects.

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