Wellcall Holdings experiencing higher raw material costs, raising selling price, says CGS-CIMB Research

NST Fri, Jun 03, 2022 09:51am - 1 year View Original


KUALA LUMPUR: CGS-CIMB Research expects Wellcall Holdings Bhd's higher sales volume due to demand pick-up to be offset by margin compression from higher input costs.

The research house said Wellcall is experiencing higher raw material costs, to about 55-65 per cent of total costs, especially with the increases in natural rubber and synthetic rubber prices in recent months.

The company aims to mitigate this impact by conducting bulk purchases for discounts and price negotiations with suppliers, holding high inventory levels, and raising its selling prices to pass on the additional cost.

"However, we believe that Wellcall has limited room to raise its selling price aggressively given its position as an original equipment manufacturing (OEM) manufacturer as selling prices need to be competitive," it said.

The research firm said that given the strong demand for its products, Wellcall is running at full capacity while facing a temporary labour shortage.

As a result, the company is sourcing manpower locally to address this issue, it said.

"This is likely to lead to an increase in labour costs, coupled with a slight impact from an increase in the minimum wage, which is less than RM1 million.

"On top of that, the company has been facing freight-related issues.

"As a result of freight cost volatility and frequent variances in shipment schedules, this has led to delayed shipments to customers and higher raw material costs," it said.

CGS-CIMB Research has kept its financial year 2022 (FY22) to Fy24 earning forecast on Wellcall given no surprises from its first half (1H) FY23 results briefing.

"We also keep our Hold call with a target price of RM1.18 on the stocks.

"While we like Wellcall for its strong fundamentals and the defensive nature of demand for its products, we believe its current valuation (slightly above its five-year mean) has already priced in the positives.

"Share price will also be supported by its solid dividend yields of 4.0-5.5 per cent (FY22-24) and net cash position of RM54.5 million (10.9sen per share at end-1HFY22," it added.

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