Thursday, April 12, 2012

PohKong ... Apr12

Mercury Securities research ...

Poh Kong’s 2Q/FY12 results (quarter ended 31st January 2012) were generally within our earlier
expectations.

“Q2 results within expectations”
Poh Kong group's 2Q/FY12 revenue of RM202.4 million was higher by 18.7% y-o-y.
The increase in revenue was attributed to the upsurge in price of gold and also the group’s existing retail stores registering higher sales. The demand for gold-based jewellery, gold bars and wafers increased during the festive spending seasons. Group 2Q/FY12 NPAT (net profit after tax) was RM12.4 million, an increase of 30.5% y-o-y. The group's revenue is largely derived from retail segment while the manufacturing segment supplies the finished gold jewellery to the retail segment.

However, comparing q-o-q versus the preceding 1Q/FY12, group 2Q/FY11 revenue and NPAT were lower by 12.2% and 29.9%, respectively.

This was mainly due to the absence of a major festival, namely Hari Raya Aidilfitri during the quarter. While Christmas occurred during the group’s Q2 (Nov-Jan), Hari Raya Aidilifitri and Deepavali festivities occurred during Q1 (Aug- Oct). Historically, peak sales for the group occur during Hari Raya Aidilfitri.

OUTLOOK/CORP. UPDATES
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.

“Sustainable Domestic Demand”
Malaysia had reported an unemployment rate of 3.4% (January 2012) and CPI of 2.2% (February 2012). Bank Negara Malaysia (BNM) has still maintained its overnight policy rate (OPR) at 3.0%. Meanwhile, Malaysia recorded a solid 4Q/2011 GDP growth of 5.2%, amidst weak economic growth in the developed regions (US, EU and Japan). A steady economic growth would also lead to higher consumer optimism and hence assist to raise domestic consumption, including spending on retail gold or jewellery products.

The spot price for gold traded on the NYMEX (New York Mercantile Exchange) is currently around the US$1660/troy ounce level. This is a significant decline from the peak highs of above the US$1900/troy ounce level. Strong global gold prices could lead to an increase in group revenues. Gold wafers, gold bars and gold-based jewellery are seen as a viable inflation-hedge or long-term investment option.

Large jewellers like Poh Kong do have revenues coming from sales of gold bars, though its management has not given any guidance on the quantum. The group’s “Bunga Raya” gold bars, which are 999.9% pure gold, are available in 1g,5g, 10g, 20g, 50g and 100g weight denominations. Gold wafers are typically sold in
the denominations of 25g, 50g and 100g.

In terms of revenue, about 80% of Poh Kong’s revenue is derived from gold, with the remainder 20% from gem stones (e.g. diamonds). From the gold-revenue segment, about 75% is derived from yellow-gold sales
while 25% is from white-gold sales. The ‘Malay and Indian’ market clientele traditionally prefers yellow-gold based ornamental products.

“Update on financing”
Poh Kong had proposed an Islamic Commercial Papers/Islamic Medium Term Notes (ICP/IMTN) Programme (up to RM150 million in nominal value), guaranteed by Danajamin Nasional Bhd. In November 2011, the group had issued an initial RM50 million in nominal value of IMTN under its ICP/IMTN
Programme. The IMTN with a tenure of 7 years, matures in November 2018. The proceeds from
the issuance of the IMTN would be utilised by Poh Kong to finance a group-wide restructuring
programme, and to refinance existing borrowings. The group had subsequently issued RM30 million and RM20 million in nominal value of IMTN on 16th January 2012 and 14th February 2012, respectively.

Meanwhile, the group had had made a final RM20 million redemption of its Murabahah Medium Term Notes on 15th February 2012. Thereafter, there was no outstanding amount of the Murabahah Commercial Papers / Murabahah Medium Term Notes and the Programme had thus been cancelled on 20thMarch 2012.

“Group internal reorganisation”
Poh Kong has embarked on a group-wide internal reorganisation exercise that would consolidate the group's existing businesses into 6 core activities, namely Retail, Wholesale & Distribution, Manufacturing, Property Investment, Franchise, and Overseas Investment. Currently, Poh Kong does not have any retail or manufacturing operations overseas.

The internal reorganisation will result in the winding up of the non-key/dormant subsidiaries, and the acquisition of all 99 retail businesses by Poh Kong Jewellers S/B, which will be the sole entity managing all the 99 retail outlets. Concurrently, the group will consolidate all its existing banking facilities amongst the various
financial institutions with the new borrowings structure that comprises primarily of Bankers' Acceptance and the ICP/IMTN Programme.

VALUATION/CONCLUSION
“Dwindling dividend payout ratio”
Poh Kong’s shareholders had approved the first and final dividend per share (DPS) of 1.4 sen single tier for its FY11 ended 31st July 2011. Confirmed shareholders registered with the group’s registrar on 13th February 2012 were subsequently paid on 9th March 2012. Poh Kong’s future dividends would be largely determined by the performance and cash-flow needs of the group. We note that the group’s dividend payout ratios have been dwindling over the past few years due to its constant annual DPS despite of its rising annual earnings. Given its strong price performance in recent months, Poh Kong (+30.2% YTD) has easily outperformed the KLCI (+3.5% YTD) in 2012.

Market conditions have also been volatile during the past year, impacted by the Arab Spring uprisings, Europe sovereign debt issue, US debt ceiling issue and the Tohoku disaster in Japan. As Poh Kong is not a particularly large marketcap stock, this may put a dampener on its market visibility and trading volume.

“Maintain Buy Call”
Based on our forecast of Poh Kong’s FY12 EPS and an estimated P/E of 4.5 times (within its historical range), we set a FY12-end Target Price (TP) of RM0.66. This TP offers a 17.9% upside from its current market price. We are pleased with Poh Kong’s strong 1H/FY12 results. Our TP for Poh Kong reflects a P/BV of 0.68 times over its FY12F BV/share.

We find that Poh Kong’s FY12F P/E and P/BV valuations are undemanding, while it has reasonable levels of net gearing ratio, dividend yield and ROE. Nevertheless, the group also face routine business risks such as any future economic downturn, consumer pessimism, uneven monthly sales (due to festive seasons), fluctuating raw material prices and foreign exchange rates, and strong competition from its peers. Going forward, the group’s upside would be largely dependent on its management’s marketing and growth strategy, and also on the overall economic conditions.

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