Monday, March 7, 2011

Tomei ... Mar11

Mercury Securities Sdn Bhd Research.

Tomei was founded in 1968, some 43 years ago. Its business initially involved the design, manufacturing and supply of jewellery to local jewellers. In the early 1970s, Tomei opened its first retail store at the Campbell Shopping Complex in Kuala Lumpur, and subsequently dealt in the wholesale and distribution of jewellery.

Tomei’s manufacturing facilities were further expanded in 1989 with the setting up of Tomei Gold & Jewellery Manufacturing SB. Meanwhile in 1998, Tomei started a JV with Eugen Schofer GmbH & Co, the largest chain manufacturer in Europe for gold and silver. During the same year, Tomei developed and manufactured its own white jewellery.

Today, Tomei Group has become an established, integrated designer, manufacturer and retailer in gold and jewellery. In the year 2002, Tomei introduced the “My Diamond” retail shops, which specializes in the white gold and diamond segment, catering for the youthful and trendy. In 2003, Tomei set up its “T.H. Jewelry” boutique retail shops in order to display its higher range of jewellery collections.

Tomei Group had acquired an established brand name – Le Lumiere, an international brand for Hearts & Arrows Diamond. This acquisition enabled Tomei Group to access the diamond market in the region. Meanwhile, the group had developed “Terengganu Art”, in order to cater for the demand for gold and silver premium gifts and corporate souvenirs.

“Expansion overseas”
In 2006, the Tomei Group expanded regionally, getting its investment licence to set up its manufacturing operations in Vietnam. Currently, Tomei has 7 retail kiosks in shopping malls within Vietnam. In 2007, the group further expanded into China, with its first retail outlet in Xian. Currently, the group has 7 retail kiosks in shopping malls in Shanghai, Shaoxin, Wuxi, Changsu and Guangzhou.

Tomei continuously focuses and commits to quality, and was first accredited with the ISO in Quality Management System for its retailing in jewellery by Llyod’s Quality Assurance Register Kuala Lumpur in 2003.

Tan Sri Datuk Ng Teck Fong is the group’s executive chairman, with over 40 years of experience in the industry. Meanwhile, Mr Ng Yih Pyng is the group’s managing director. They are also involved in various goldsmith and jewellers’ associations. The group also has a technological tie-up with Schofer since 1998.

In 2006, Tomei Consolidated Bhd was listed on the Second Board of the local stock exchange. The following year, the company’s listing status was upgraded to the Main Board of Bursa Malaysia. Today, the group has 60 local jewellery retail outlets within its 4 major umbrella brands – namely Tomei, Le Lumiere, My Diamond and T.H. Jewelry. The group’s jewellery products are also exported to Indonesia, Singapore, Thailand, UAE, Hong Kong, China and Europe.

Tomei’s group revenue for its 4Q/FY10 ended 31st December 2010 was RM93.7 million, an increase of 12.4% from RM83.3 million achieved in the preceding year’s 4Q/FY09. This increase in revenue was mainly due to the improved consumers’ spending and higher retail gold price.

“Improved consumer spending”
However, the group’s profit before tax (PBT) increased slightly to RM8.01 million from RM7.95 million recorded in the preceding year’s corresponding quarter mainly due to the start up cost for new outlets and kiosks and also other higher operating costs.

The group’s revenue for FY10 ended 31st December 2010 had also increased by 18.4% to RM356.3 million as compared to RM300.9 million in the preceding year mainly due to the opening of more retail outlets and kiosks and higher retail gold price. Correspondingly, the group’s PBT also increased by 15.6% to RM30.4 million.

Meanwhile, the group’s revenue for 4Q/FY10 had decreased slightly by 2.3% to RM93.7 million as compared to the preceding 3Q/FY10 due to the Hari Raya Aidilfitri holidays occurring during the third quarter of the year. However, the group’s PBT had increased by 17.7% to RM8.0 million in 4Q/FY10 from RM6.8 million recorded in the preceding 3Q/FY10 mainly due to better sales of higher margin products.

During FY10, 79.1% of Tomei’s group revenue is derived from its Retail segment while the remaining 20.9%
of revenue is derived from its “Manufacturing & Wholesales” segment. Currently, about 67% of its group revenue is derived from yellow gold products while the remainder 33% is derived from white gold and diamonds, precious stones and other metals set in stone.

Post recession, Tomei’s group revenues have been on the uptrend. The domestic economy has been growing at a reasonable rate during the past year and we expect the group’s revenues to grow at a comfortable rate as well.

“Domestic economy still growing respectably”
The latest available Malaysian economic data (December 2010) revealed reasonably positive growth rates in y-o-y percentage terms, for instance: IPI (+4.2 y-o-y), and Manufacturing Sales (+11.4% y-o-y), Exports (+4.6% y-o-y) and Imports (+11.5% y-o-y). Malaysia had reported a very respectable 4Q/2010 GDP growth of +4.8% (+7.2% for full year 2010) and CPI of 2.4% (January 2011) while Bank Negara Malaysia (BNM) had last reaffirmed its overnight policy rate (OPR) of 2.75% in January 2011.

“Diversified business model”
Tomei is unique in the sense that the group is an integrated designer, manufacturer, exporter and retailer in gold and jewellery. Excitingly, the group has also ventured into China and Vietnam, and would be exploring other regional markets as well. The group also has a balanced focus on both gold and jewellery products. Its management also focuses on maintaining strong relationships with mall operators, which gives them an upper hand in securing choice store locations within popular shopping malls. Meanwhile, Tomei would be setting up a manufacturing facility in AMATA Industrial Park, Dong Nai in Vietnam.

“Optimistic going forward”
Going forward, Tomei plans to make inroads into increasingly affluent suburban locations, including in East Malaysia. The group plans to spend RM5 million in capital expenditure to open up to 9 new outlets locally in 2011. Besides that, its management plans to open 2 outlets and a manufacturing facility in Vietnam, and also 5 outlets in China within 2011. In China and Vietnam, the group places its kiosks within Parkson stores. The group also typically launches around 400 new designs per year and plans to spend around RM4 million for A&P (advertising and promotion) campaigns during 2011. The group is also readily on the lookout for M&A opportunities within its industry.

“Exclusive Rights to Batar Jewellery”
On 25th January 2001, Tomei had announced that it has entered into an exclusive Distribution Agreement with Shenzen Batar Jewellery Company Ltd in China to distribute Batar Jewellery in Malaysia. Tomei shall hold the sole distribution right and to use the brand name Batar Jewellery in Malaysia for a period of one year until 31st December 2011, provided that both parties may further renew this Distribution Agreement upon the expiry period. Batar is especially well known in China for its 24K gold products. Besides Batar, Tomei is also the exclusive distributor for other foreign jewellery brands in Malaysia, such as Prima Gold (from Thailand) and Warner Brothers’ Baby Looney Tunes Gold & Jewellery Characters.

“Gold prices above US$1400/ounce”
Amidst political upheaval in the Middle East, gold spot prices have reached above the US$1400/troy ounce level recently. The spot rate for gold traded on the NYMEX (New York Mercantile Exchange) is currently around US$1414/troy ounce. If global gold prices keep go higher, this could lead to a slight increase in Tomei’s revenues, given that the group sells gold bars and gold wafers (in denominations between 5g and 1kg). Gold bars, which are 999.9% pure gold, are commonly available in 5g, 10g, 20g, 50g and 100g weight denominations.

Gold wafers, gold bars and gold-based jewellery are seen by some 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 thatmay 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. Nevertheless, 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.

“Disposal of properties”
In December 2010, 4 subsidiary companies of Tomei group had disposed off a total of 6 parcels of land and building to Oasis Properties SB. The total consideration of RM4.6 million was derived based on valuation reports issued by an independent professional valuer CH William Talhar & Wong. The consideration is expected to receive in cash and will be utilized for working capital purpose of the group. The disposal has resulted in a gain of RM1.0 million for the group. Oasis Properties SB is a company controlled by Tan Sri Datuk Ng Teck Fong, a director and major shareholder of the company.

In June 2010, the group had paid a first and final gross dividend per share (DPS) of 3 sen per share amounting to RM4.2 million for its FY09 ended 31st December 2009. While Tomei’s management does not have a fixed dividend policy, it has indicated that it would be able to give out at least a similar dividend rate.

“Reasonably attractive dividends”
Tomei has an adjusted beta of 0.88 to the KLCI, and has underperformed the KLCI slightly this year (by -8.45% vs. -1.24% year-to-date (YTD)). In recent months, Tomei’s stock price has maintained well above the RM0.60 level. Nevertheless, as Tomei is not a particularly large market-cap stock, this may put a dampener on its market visibility and trading volume.

“Target price of RM0.84”

Based on our forecast of Tomei’s FY11 EPS and estimated P/E of 4.5 times, we set a FY11-end Target Price (TP) of RM0.84. This TP represents a reasonable 29.2% upside from its current market price. Our TP for Tomei reflects a P/BV of 0.68 times over its FY11F BV/share. Meanwhile, the domestic “Clothing & Accessories” sector’s average P/E and P/BV is 7.7 times and 0.77 times, respectively. Tomei’s P/E and P/BV valuations are very undemanding indeed.

“Strong business model”
We like Tomei due to its diversified business model (in terms of segment and location), reputable brand name, wide product range, strong design expertise, large retail network, calculated expansion strategy and solid ROE. In terms of business risks, Tomei does face risks from any economic downturn, consumer pessimism, uneven monthly sales (due to festive seasons), stiff peer competition, rapidly fluctuating gold prices and foreign exchange rates.

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