PohKong ... Oct10

PERFORMANCE
Poh Kong’s full year FY10 revenue and net profits both came in well in-line our earlier expectations. Overall, FY10 was a better year for Poh Kong compared to its FY09.

“No surprises in Q4 results”

Poh Kong's revenue for 4Q/FY10 ended 31st July 2010 was higher at RM131.9 million as compared to the revenue in the corresponding 4Q/FY09 of RM124.1 million, amounting to an increase of RM7.8 million. The increase in group revenue was mainly due to the higher sales recorded at its existing stores. We nevertheless note that there were no major Malaysian festivals during its 4Q/FY10.

The group's 4Q/FY10 profit before tax (PBT) at RM9.6 million was lower as compared to the profit before tax of RM11.7 million recorded during 4Q/FY09. This PBT decrease of RM2.1 million was mainly due to the increase in its operating costs during 4Q/FY10.

CORP. UPDATES/OUTLOOK
Poh Kong’s management plans to continue its drive to build market share by enhancing and differentiating its product offerings to its targeted market segments. The group actively evaluates various initiatives and opportunities to attract new customers through the introduction of new product lines/designs and enhanced customer service. Poh Kong’s sales growth would also be driven by promotional activities during festive seasons or road shows. Currently, Poh Kong is only planning to expand its outlet network at a moderate pace.

“Moderate outlet expansion”

The Malaysian economy had grown in 2Q/2010 with a strong GDP growth of 8.9% y-o-y. Inflation, as measured by the consumer price index (CPI), usually moves in tandem with GDP growth. The latest CPI of +2.1% for August 2010 shows that the economic recovery is well on-track. Meanwhile on 2nd September, the overnight policy rate (OPR) had been reaffirmed by BNM at 2.75%. A steady economic growth would also lead to better consumer optimism and hence assist to raise domestic consumption, including spending on retail products.

“Economy and retail sales to grow steadily”

Retail Group Malaysia (RGM) which tabulates retail data, has revised upward its 2010 growth forecast for the local retail industry to 6.1% from 5.5% initially due to the better-than-expected performance by its members in the third quarter of the year.

The revised total sales turnover expected for this year is RM75.3 billion (compared with RM74.9 billion earlier), according to the Malaysia Retail Industry Report (September 2010) issued by RGM recently. It said in its report that members of the retailers’ association expected their businesses to expand by 6.8% in the third quarter of this year, slightly higher than the earlier estimate of 6% by RGM.

Gold wafers, gold bars and gold-based jewellery could be seen as a viable inflation-hedge or long-term investment option (e.g. as an alternative to term-deposits and government-issued bonds). Consumers nowadays have the option of investing in gold via commercial banks (via “gold investment accounts”) or even via MLM (multilevel-marketing) companies that may offer gold-based investment products (e.g. gold coins and gold bars). In some countries, gold-related investments could also be done via gold ETFs (exchange traded funds), gold certificates and gold-based derivatives.

“Gold prices well above US$1300/ounce”

Gold spot prices have been steadily on the uptrend since August 2010 and have recently reached a record high of US$1387/troy ounce. The spot rate for gold traded on the NYMEX (New York Mercantile Exchange) is currently around US$1379/troy ounce. If global gold prices keep go higher, this could lead to a short-term increase in Poh Kong’s profit margins (if it raises product prices) but this could dampen consumer demand (affecting affordability).

We believe that large jewellers like Poh Kong do have some revenues coming from sales of gold bars, though its management has not given any guidance on this. Gold bars, which are 999.9% pure gold, are commonly available in 1g, 5g, 10g, 20g, 50g and 100g in weight denominations. More often than not, gold jewellery are bought largely for ornamental usage e.g. for wedding dowry, ceremonial/formal functions and as gifts to spouses or close family members.

Poh Kong constantly evaluates its operational efficiency/costs, capital expenditure, outlet-expansion plans, gearing and gold inventory levels. Meanwhile, the group continues to place strong emphasis and commitment on design, craftsmanship, reputation, premium quality and competitive pricing. On the marketing side – its intensified efforts in advertising and promotions (A&P), merchandising and product launches, sponsorships and road shows during the year would help to maintain the group’s market leading position.

VALUATION
Generally, we expect that Poh Kong’s FY11 results would hold up in view of the current economic conditions and trend.

"Proposed gross DPS the same as before”

We had assumed that Poh Kong will declare a slightly better gross dividend per share (DPS) of 2.0 sen for its FY10 and FY11. This is on the premise that it has maintained a dividend payout of around 20% in recent years. The group has also been successfully paring-down its net gearing levels.

Subsequently, Poh Kong had proposed a first and final tax exempt dividend of 1.4 sen (equivalent to 1.9 sen gross DPS) for its FY10 ended 31st July 2010, which is the same as its FY09 gross DPS. The proposed dividend will be subject to shareholders' approval at the next AGM and is estimated to amount to RM5.7 million.

With the share capital worth RM205.2 million consisting of 410.4 million shares of RM0.50 each, its market capitalization amounts to RM172.4 million. It has an adjusted beta (correlation factor) to the KLCI of 0.83 and the stock is up by 2.4% YTD, underperforming the KLCI (KLCI: +17.0% YTD). Its 52-week trading range is between RM0.35–0.46.

“Very undemanding valuations but no catalyst for upgrading yet”

Based on our forecast of Poh Kong’s FY11 EPS and P/E of 5 times, we set a FY11-end target price (TP) of RM0.42, which is the same as its current market price. This TP values Poh Kong at just 0.5 times its FY11 book value (BV) per share. As such, its valuations appear very undemanding compared to most of the domestic listed retailers’ P/E and P/BV. We note that the average P/E and P/BV for domestic specialty retailers is at 10.5 times and 1.9 times, respectively.

Nevertheless, we maintain our Hold Call on Poh Kong, given that its low single-digit revenue (top-line) growth and trading volume limits its stock price upside. In the future, if Poh Kong possesses “catalysts” such as higher revenue growth rate and better share trading volumes, we may consider upgrading our view on Poh Kong to a Buy Call.