MANAGEMENT DISCUSSION AND ANALYSIS
DEAR VALUED STAKEHOLDERS,
On behalf of the Management, I am pleased to present the Management Discussion and Analysis of Wellcall Holdings Berhad (“the Company”)
and its subsidiary company (“Wellcall” or “the Group”) for the financial year ended 30th September, 2019 (“FYE 2019”).
OVERVIEW
In FYE 2019, our performance was commendable and we managed to sail through our challenging journey amidst the
volatility of the global market sentiment. Nevertheless, the fundamentals of demand for our industrial rubber hose remain
strong resulting from the gradual recovery of both the emerging and developed countries. We are confident that, we are
able to perform and deliver our results through our solid base and to position ourselves to meet the surge in demand arising
from the recovery of global economy.
BUSINESS AND OPERATIONS REVIEW
The principal activity of the Company is investment holding, while the principal activity of a wholly-owned subsidiary
company is manufacturing industrial rubber hose for customers who are mainly in the business of distributing rubber hose
to original equipment manufacturers. Therefore, the Group's business segment mainly comprises the manufacture and sale
of rubber hose and related products, which is confined to a single business and by geographical segment.
Our export market accounted for approximately 91% of the Group's revenue covering over 70 countries while the remaining
of approximately 9% was derived from domestic market. Hence, the market sentiment in the global economy plays an
important role in driving the demand for rubber hose especially for replacement demand as well as product variations
and penetration to new markets. Our geographical market segment is as disclosed in Note 28 of the FYE 2019 financial statements.
We have been continuously leveraging on our extensive customer network, improved productivity, quality services and our product
range in FYE 2019. We will continually strive to enhance our competitive strengths in these areas to stay ahead of market trends.
Our third plant is equipped with new automated production lines and machines of higher technology specifications which enables
improvements in production quality and efficiency and overall production capacity, with room for us to expand in the future.
Our track record of more than 20 years in the rubber hose industry and over 40 years of industry knowledge have served a
concrete platform for our presence in the rubber hose industry globally. Our product quality and reputable customer service
have also aided us to expand our customer base to more than 200 customers. Besides product quality and reputable customer service,
the Group has a strong research and development capability teamed by experienced personnel to deliver improved and innovative
products and new processes. This value-added services and products customisation according to the customer's specification
and requirements provided to our customer in order to meet their satisfaction level.
The Group has also expanded its products range to various application markets ranging from air and water, oil and gas,
welding, automotive, ship building, abrasion, food and beverages and chemical applications. Additionally, the Group possess
the ability to customise its manufacturing to suit its customers' product requirements in terms of rubber hose sizes,
pressures and temperature resistance. Our products are accredited by independent third party for product quality assurance
and recognition such as SGS, Lloyd's Register, Flinders Cook, SIRIM QAS International and Malaysia Rubber Board.
Nevertheless, the Group continues to strive to perform well and to maintain its dividend pay-out ratio of at least 50% of the
net profit for the year. Increasing our base of customers and revenue coupled with operational efficiencies are the key drivers of
the Group to achieve its profitability. The Group's revenue and purchases are primarily traded in foreign currency and it is
the Group's practice to keep the foreign currency exposure to an acceptable level.
To deepen the Group's talent pool, we continue to recruit or engage professionals and more experienced personnel from
various fields to cater for future expansion. In-house trainings have been conducted for employees to assist them in applying
relevant information into their daily tasks. The Group continuously reviews its human resource policies and practices to ensure
staff welfares are well taken care of.
We trust that with the Group's strength, capabilities and sound underlying fundamentals, the Group would be ableto step forward
positively in an uncertain and challenging global economy.
FINANCIAL PERFORMANCE REVIEW
Review on Statements of Comprehensive Income
The Group recorded revenue of RM170 million with a slight decrease of RM 1 million (1%) as compared to last financial year
ended 30 September, 2018 (“FYE 2018”). The export and local market contributed approximately 91% and 9% respectively
to the Group's annual revenue. The overall revenue achieved remain fairly consistent with previous financial year was mainly
due to the continuation of recovery in global demand for industrial rubber hose and fairly benefited from the increase in selling
price as well as volume for some hoses.
Despite a slight decrease in revenue for FYE 2019, the Group managed to mark a higher gross profit margin at 36% compared to 32%
for FRY 2018. The said increase was due to operational efficiency arising from effective costs management and productivity, i.e.
lower raw material purchase costs, control on stockholding period, maximisation of raw material usage to reduce wastage and scrap
in the production processes.
The following tables highlight the Group's key financial performance for FYE 2019: -
| RM'mil |
FYE 2019 |
FYE 2018 |
Change |
| Revenue: |
|
|
|
| (a) Export market |
154 |
152 |
2 |
| (b) Local market |
16 |
19 |
-3 |
| Total |
170 |
171 |
-1 |
| RM'mil |
FYE 2019 |
FYE 2018 |
Change |
| Revenue |
170 |
171 |
-1 |
| Expenses |
123 |
131 |
-8 |
| Other Operating Income |
3 |
3 |
- |
| Gross Profit |
62 |
55 |
7 |
| Profit Before Taxation |
50 |
43 |
7 |
| Profit After Taxation |
37 |
32 |
5 |
| |
|
|
|
| Gross Profit Margin |
36% |
32% |
4% |
| Pre-Tax Margin |
29% |
25% |
4% |
| Net Profit Margin |
22% |
19% |
3% |
The Group recorded a higher profit before taxation (“PBT”) of RM 50 million for FYE 2019 compared to PBT of RM
43 million recorded in FYE 2018, representing an increase of RM 7 million, approximately of 16%. Higher PBT was
mainly due to well control of selling & distribution costs and administrative expenses which were quite stagnant
compared to FYE 2018.
The Group's performance also being measured by the following non-financial indicators for FYE 2019: -
Customer Retention Rate
For FYE 2019, the customer retention rate was recorded at 98% for existing customers who have dealt with the
Group. In order to maintain this retention rate, the Marketing team maintained regular contact with our customers
to ensure that all issues are addressed and follow up on any outstanding matters on timely basis. Production team
as well played an important role in maintaining this retention rate by providing the right products as per customers'
requirements on a timely basis.
Customer Satisfaction Rate
This was measured by feedback received by the Marketing team and subsequently tackled the issues raised by
customers professionally by understanding the customers' expectation. The customer satisfaction rate measured
for FYE 2019 was 0.2% over the total revenue for the Group.
On Time Delivery
The Group is practising flexibility to customers' orders in terms of order quantities with variety of product types. The
Group also maintains short sale lead time from the time placing of orders until delivery of goods. This is an essential
factor to customers by meeting the delivery time that agreed upon placing of orders. On time delivery is essential for the Group
to maintain its long-lasting relationship with customers as time factor is always important in business aspect.
The on-time delivery rate for the year under reviewed was 98%.
Review on Statements of Financial Position
| RM'mil |
FYE 2019 |
FYE 2018 |
Change |
| Total Assets |
138 |
131 |
7 |
| Total Liabilities |
22 |
23 |
-1 |
| Total Equity |
116 |
107 |
9 |
| Total Borrowings |
- |
- |
- |
| Cash and Bank Balances |
53 |
37 |
16 |
| |
|
|
|
| Net Asset Per Share (sen) * |
23.38 |
21.59 |
1.79 |
| Basic Earnings Per Share (sen) * |
7.39 |
6.36 |
1.03 |
| Dividend Per Share (sen) * |
5.60 |
5.60 |
- |
* Adjusted to reflect the shares split of every two (2) ordinary shares into three (3) ordinary shares held in the
Company. The issued and paid up capital of the Company is 497,947,555 ordinary shares and prior to the shares split was
331,965,037 ordinary shares.
The Group's total assets recorded at RM138 million for FYE 2019 compared to RM131 million for FYE 2018.
The increase was mainly due to increase in cash and cash equivalents from RM 37 million for FYE 2018 to RM 53 million for FYE 2019.
Despite increase in cash and cash equivalents amounted to RM 16 million, inventories and trade receivables were decreased by
RM 6 million for FYE 2019 compared to FYE 2018 due to more effective controls in stockholding period and credit controls for trade receivables.
Total liabilities have slightly decreased from RM23 million to RM22 million was mainly due to reduce in trade and other payables.
The Group's financial position remains positively strong with net assets per share of 23.38 sen per share for FYE 2019
(FYE 2018: 21.59 sen per share). Basic earnings per share in FYE 2019 was 7.39 sen per share as compared to 6.36 sen per share in FYE 2018.
Beholding at the sound financial platform, the Company has been declaring consistent dividend pay-out to reward its shareholders.
Total paid out of 5.60 sen per share was consistent for both FYE 2019 and 2018.
Review on Statements of Cash Flow
The Group recorded a net cash from operating activities of RM49 million for FYE 2019, representing an increase of RM8 million or 20%
increase compared to FYE 2018. This mainly due to effectiveness of credit control on receivables which resulted in better collections
and also better stockholding period for inventories. The increase in net cash from operating activities was the net off effect of increase
in net change in working capital changes and increased in tax paid amounted to RM12 million for FYE 2019 compared to RM6 million for FYE 2018.
Net cash flow used in investing activities was amounted to RM6 million for FYE 2019 compare to RM7 million for FYE 2018. The investing
activities mainly in purchase of property, plant and equipment for the financial year under reviewed.
The Group's net cash used in financing activities amounted to RM28 million for FYE 2019 compared to RM36 million for FYE 2018.
The different was due to repayment of term loans amounted to RM8 million for FYE 2018.
Capital Expenditure
The Management believes that continuous reinvestment is essential for the Group to be competitive in this volatile market to ensure sustainable
growth in delivering long term value to its stakeholders. The Group is also keeping abreast with technological changes whereby continuous capital
investment are vital to enhance the efficiency and productivity. In this respect, the Group had invested substantial capital in its property,
plant and equipment inprevious financial years. For the FYE 2019, most of the Group's capital investment of RM6 million would relate mainly
to maintenance and upgrading of older production lines to further improve our productivity.
CORPORATE GOVERNANCE
The Group is committed to implement the best practice of corporate governance to enhance and increase shareholders'
value. The Group has its risk management and internal control procedures to ensure transparency, accountability and
integrity are attained and maintained in managing the Group businesses.
Policies that the Group has officially adopted includes Corporate Disclosure Policy, Fraud Policy, Whistle Blowing Policy,
Enterprise Risk Management Policy, Succession Planning Policy and Emergency
Succession Policy, where the Group will continue to adopt more corporate policies to ensure sustainability of the Group.
The Board of Directors' responsibilities for preparing the annual audited financial statements are disclosed in the Directors'
Responsibilities Statement set in this Annual Report 2019.
The audited financial statements of Wellcall is not subject to any qualification as disclosed in the Independent Auditors'
Report to the Members.
RISK RELATING TO OUR BUSINESS
Exposure to Credit Risk
The Group's exposure to credit risk arises primarily from trade receivables. It is the Group's objective to seek continual
revenue growth while minimises any losses arising from impairment of bad debts from our trade receivables. There are various measures
being practised by the Group to minimise the credit risk, e.g. evaluation of customers' requests on change of credit terms, tighten
up credit control procedures within the Group by the Finance team on collections from customers and exploring credit insurance on
credit terms customers.
Fluctuation of Raw Materials Costs
The Group is exposed to raw materials costs fluctuation which may adversely affect the cost of sales and gross profit margin of the Group.
In order to minimise the fluctuation of raw materials purchase costs, the Group's procurement team has planned the purchases systematically
as well as negotiate the prices with the relevant suppliers before placing orders. We also continuously maintain close and healthy relationship
with suppliers and emphasize on consistency in supply of raw materials with a competitive pricing.
Competitive Risk
The Group is exposed to competitive risk for its products from other competitors in the aspects of both prices and quality. In order to
minimise this competitive risk, the Group's Research and Development team has continuously in improving the quality of our products and yet
at a competitive cost in order to maintain the customer retention rate.
Economic Risk
The Group’s exposure to economic risk primarily from the world economic downturn which may affect the Group's revenue. The economic risk
is also associated with credit risk which may affect creditworthiness of customers and consequently affect the Group’s collection. In order to
cope with the economic risk, a sound credit control procedure is in practice to monitor collections closely.
INDUSTRY TREND, DEVELOPMENT AND PROSPECT
Demand for industrial rubber hoses will continue to see a gradual recovery from both emerging and developed economies.
Moving forward, the Group will ensure it stays ahead of market trends, responding swiftly to changes through automation
and research. In the near term, the Group expects the raw material prices to trend at higher levels due to supply and demand
mechanism of raw materials and foreign exchange volatility.
Meanwhile, the additional capacity from plant 3 supports the Group in further strengthening its position in the market
with a wider range of industrial hose. However, the outlook of the global economy remains challenging and uncertain.
Nevertheless, the Group strategies are to focus on leveraging on its extensive customer network, improved productivity,
quality services and product range to enhance its competitive edge.
Moving forward, the outlook and headwinds of the global economy remains challenging, particularly in the industrial rubber
hose market. Nevertheless, the Group strategies are to focus on leveraging its extensive customer network, productivity,
quality service and product range to enhance its competitive edge. Correspondingly, the Group continues to remain responsive,
resilient and vibrant to sail through and surpass challenges ahead. Barring any unforeseen circumstances, the Board believes that the
Group's prospects in the forthcoming financial year ending 30th September, 2020 (“FYE 2020”) continues to remain
positive despite challenges ahead and hopes to achieve a better result than this year. The Group will continue to be well positioned
to improve our performance in forthcoming FYE 2020, strive towards maintaining the Group's vision to be the world's leading
manufacturer of quality industrial hoses. We are also encouraged by our customers for continued growth and expansion in our core
business with the support from all stakeholders.
The Company has initiated its product diversification into composite hoses by entering into a joint venture with Trelleborg Holding AB
on 15th January, 2019. The said joint venture has formed Trelleborg Wellcall Sdn. Bhd. (“TWSB”) for the purpose of manufacturing,
marketing and selling of composite and fittings. The Company has subscribed a total of RM4,419,648.10 representing 49% of total issued
capital in TWSB. However, there is no significant changes in the composition of the Group with the subscription of shareholding in TWSB
by the Company.
For the year ahead, the Group will continue its effort in widening the customer base through geographical expansion. We will continue to
expand into existing markets, namely Europe, USA, Canada, Middle East, Asia, Australia/ New Zealand, South America and Africa. Our experienced
and customer-oriented marketing team will venture into new countries in order to further expand our customer base. All enquiries from
potential customers will be responded promptly and accurately by the team members.
DIVIDEND
For FYE 2019, the Company had:
i) On 28th March, 2019, paid a first single tier dividend of 1.40 sen per share on 497,947,555 ordinary shares
amounting to RM6,971,266;
ii) On 28th June, 2019, paid a second single tier dividend of 1.40 sen per share on 497,947,555 ordinary shares
amounting to RM6,971,266;
iii) On 27th September, 2019, paid a third single tier dividend of 1.40 sen per share on 497,947,555 ordinary
shares amounting to RM6,971,266; and
iv) On 24st December, 2019, paid a fourth single tier dividend of 1.45 sen per share on 497,947,555 ordinary
shares amounting to RM7,220,240.
The Group has been consistently paying out favourable dividends over its financial years. The Group has also exceeded its dividend
pay-out ratio over the past six (6) financial years of more than 70%. The Company practices to maintain dividend pay-out ratio of
at least fifty percent (50%) of its net profit per year. Prior to dividend declaration for approval, the Group ensures that it meets
the provision under the Companies Act 2016 as prescribed by the solvency test. The Group ensures it meets its profit availability test,
able to pay its debts as and when the debts become due within twelve (12) months immediately after the distribution is made and is in
net assets position.
APPRECIATION
On behalf of the Management, I wish to express my sincere appreciation and gratitude to all our valued shareholders, business
associates, government agencies, financial institutions, investment analysts, bankers and fund managers, customers,
suppliers and friends for their continued support, co-operation and confidence towards our products and services. Our
appreciation is also extended to our employees for their commitment, dedication, invaluable contribution, skills, energy
and professionalism towards the performance of the Group. The successes of the Group achieved in FYE 2019 could not have been
possible without their efforts. I would also like to thank our fellow Board of Directors for their valuable advice, guidance and
support rendered to the Group.
HUANG SHA, P.M.P
Group Managing Director