Monday, August 29, 2011

Tomei ... Aug11

Mercury Securities Sdn Bhd Research

PERFORMANCE – 2Q/FY11
Tomei’s 1H/FY11 revenue (first half ended 30th June 2011) was above our earlier expectations, while NPATMI (net profit after tax and minority interest) was within.

“1H revenue above expectations, NPATMI within”
The group’s revenue for 2Q/FY11 was RM117.7 million, an increase of 49.0% y-o-y from 2Q/FY10. This increase was mainly due to the improved consumers spending especially on gold investment products and also due to the higher retail gold prices. The acquisition of the brand “Goldheart” with 4 additional retail outlets also contributed positively to group revenue. Group NPATMI for 2Q/FY11 of RM6.4 million was an increase of 51.8% y-o-y.

Group revenue for 1H/FY11 was RM233.0 million, an increase of 39.8% versus 1H/FY10. Meanwhile, group NPATMI for 1H/FY11 was RM14.6 million, 29.1% higher versus 1H/FY10.

The group’s 2Q/FY11 revenue had increased slightly by 2.2% q-o-q versus 1Q/FY11. However, due to as increase in operational expenses brought about by additional new retail outlets, the group’s NPATMI had decreased by 22.6% q-o-q.

OUTLOOK/CORP. UPDATES

Tomei’s group revenues have been on the uptrend during the past few years. 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.

“Steady domestic growth”
Malaysia had reported a CPI of 3.4% (July 2011). In early July 2011, Bank Negara Malaysia (BNM) had maintained its overnight policy rate (OPR) at 3.0% but raised the statutory reserve requirement (SRR) for banks from 3% to 4% in order to rein-in inflationary pressures. According to BNM, Malaysia’s 2Q/2011 GDP rose by 4%, following a revised 4.9% GDP growth in 1Q/2011. At the moment, BNM is still expecting a full-year GDP growth of around 5.0% for Malaysia.

“Gold prices above US$1700/ounce”
Amidst economic weakness in the US and Europe, gold spot prices have gone above the US$1700/troy ounce level. The spot rate for gold traded on the NYMEX (New York Mercantile Exchange) is currently around US$1763/troy ounce. If global gold prices keep going 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 between the 5g to 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 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. 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.

“Integrated Jeweller”
Tomei is an integrated designer, manufacturer, exporter and retailer in gold and jewellery. The group has a balanced focus on both gold and jewellery product segments. The group typically launches around 400 new designs per year and plans to spend around RM4 million for A&P campaigns during 2011. In July 2011, Tomei was given the Malaysian Brand Award by SIRIM and SME Corp.

Tomei plans to make inroads into increasingly affluent suburban locations, including in East Malaysia. Excitingly, the group had ventured into China and Vietnam, and may be exploring other regional markets as well. According to a press statement in May 2011, the group is aiming to expand further by opening more retail outlets this year, comprising 4 in Malaysia, 2 in Vietnam and 4 in China. For the expansion, the group plans to use RM25 million.

Currently, the group has around 64 retail outlets nationwide, 7 kiosks in China and 7 in Vietnam. In China, Tomei had expanded its retail kiosks beyond Shanghai into cities such as Shaoxin, Changsu, Wuxi and Guangzhou. In Vietnam, Tomei has set up a factory in Dong Nai (to manufacture jewellery for the local market as well as export market) while its retail kiosks are mainly centred Ho Chi Minh City and Hanoi.

“Online loyalty programme”
In May 2011, Tomei unveiled a cardless online jewellery loyalty programme named “Jewel Club”, which is reputedly the first of its kind in Malaysia. Membership is open to all Malaysians and working expatriates aged 18 and above. It serves to give customers more benefits and shopping privileges. The loyalty programme enables more savings when making purchases and provides information on promotions offered by all the group’s brands. The group has 5 major umbrella brands namely Tomei, My Diamond, TH Jewelry, Le Lumiere and Goldheart.

“Took over Goldheart’s Malaysian ops”
In March 2011, the group via its wholly-owned Tomei Gold & Jewellery Holdings (M) S/B had entered into a S&P Agreement with Goldheart Jewelry S/B to acquire Goldheart’s retail operations in Malaysia for a total cash consideration of RM5.6 million. Goldheart is a renowned brand for retail jewellery in Malaysia. From our market survey, we note that Goldheart is a popular retail destination for couples seeking wedding or engagement rings.

Goldheart has 4 retail outlets located in major shopping malls in Malaysia. The acquisition is part of Tomei’s business plan and expansion strategy to improve its market share in the retail jewellery industry. We believe that the group is still on the lookout for synergistic M&A opportunities within the industry. In May 2011, the group’s wholly-owned Tomei Retail S/B had acquired 100 shares of RM1 each representing 100%- equity interest in Goldheart (M) S/B and Goldheart Jewelry (M) S/B, for a total cash consideration of RM100 each.

VALUATION/CONCLUSION
Tomei had paid out its FY10 first and final single tier dividend of 3.3 sen per share (amounting to RM4.6 million) to shareholders in June 2011. In recent years, Tomei has managed to pay out dividends of at least 20% of its net earnings, and we foresee that Tomei would follow this trend of having a dividend payout ratio of around 20%.

“Steady dividend payout”
With an adjusted beta (correlation factor) of 0.88 to the KLCI, Tomei (-2.8%) has slightly outperformed the KLCI (-4.5%) this year. Market conditions have also been volatile in recent months, impacted by the Arab Spring uprisings in the Middle East/North Africa, sovereign debt issue in Europe, debt ceiling issue in the US and the Tohoku disaster in Japan. As Tomei is not a particularly large market-cap stock, this may put a dampener on its market visibility and trading volume.

“Maintain Buy Call”
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 RM0.96. This TP represents a 39.3% upside from its current market price. Our TP for Tomei reflects a P/BV of 0.77 times over its FY11F BV/share. The domestic “Clothing & Accessories” sector’s average P/E and P/BV is 9.9 times and 0.78 times, respectively. Tomei’s P/E and P/BV valuations are very undemanding indeed.

“Undemanding Valuations”
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, reasonable dividend yield and solid ROE. In terms of business risks, Tomei does face routine risks from any economic downturn, consumer pessimism, uneven monthly sales (due to festive seasons), stiff peer competition, rapidly fluctuating gold prices and FX rates.

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