Tomei ... May12

Mercury Research Securities

PERFORMANCE – 1Q/FY12
Tomei’s 1Q/FY12 revenue (for quarter ended 31st March 2012) was within our earlier expectations. However, group NPATMI was below our expectations.

“Q1 – Revenue within expectations, but NPATMI below”
The group’s 1Q/FY12 revenue was RM155.7 million, a strong increase of 35.1% y-o-y. The increase was mainly due to improved consumers spending particularly on gold investment products. However, the group’s NPATMI decreased by 7.7% y-o-y, mainly due to the fluctuation in gold prices. We also noted higher y-o-y “Selling and Distribution” expenses and finance costs during the quarter.

“Dropping gold prices affect margins”
The group’s Retail segment reported a 33.6% yo-y increase in revenue to RM120.9 million during the quarter, mainly due to the strong consumer demand for gold investment products. The acquisition of the brand “Goldheart” (in Malaysia only) with 4 additional retail outlets also contributed positively. However, due to the fluctuation in gold prices, segmental PBT during the quarter decreased 2.5% to RM 9.2 million.

The group’s “Manufacturing and Wholesales” segment reported a 40.5% y-o-y increase in revenue during the quarter. The improvement was mainly due to the better sales volume to other jewellery retailers. The acquisition of O M Design S/B also contributed positively to the group’s wholesales segment. However, due to the fluctuation in gold prices, PBT during the quarter decreased 23.1% to RM 1.3 million.

The group’s revenue for 1Q/FY12 had increased by 13.5% versus the preceding 4Q/FY11, mainly due the better sales volumes. However, due to the fluctuation in gold prices, the group’s PBT decreased slightly by 2.4%. The group’s Retail segment revenue and profits increased, mainly due to the better sales volume and increase number of retail outlets. The group’s “Manufacturing and Wholesales” segment had a marginal q-o-q drop in revenue during the quarter. However, the segment PBT drop was quite substantial in percentage terms. This was mainly due to the drop in gold prices.

OUTLOOK/CORP. UPDATES
“Europe woes affecting sentiment” The economic and political volatility in Europe is affected the overall consumer and business sentiment. Nevertheless, economic growth in some regions, particularly Asia is still driving international trade. Currently, Malaysia’s economic data is relatively unaffected, safe for some weakness shown in export data. Domestic consumer demand and investment levels remain supportive of GDP growth. Keeping in mind all these factors, group management have allocated RM20 million to open up to 6 new stores nationwide (probably in the Klang Valley, Kedah and Sabah) by year-end in view of strong
domestic demand for gold products.

“Local economy – still OK” Malaysia had reported a reasonable inflation figure (CPI) of 2.3% (1Q/2012). Bank Negara Malaysia (BNM) had still maintained its overnight policy rate (OPR) at an accommodative 3.0%. Meanwhile, Malaysia recorded a reasonably positive 4Q/2011 GDP growth of 5.2%, amidst weak economic growth in the developed regions (US, EU and Japan). According to the Malaysian Department of Statistics’ March 2012 data, the country recorded the following – Manufacturing Sales (+3.1% y-o-y), Industrial Production Index (IPI) (+0.6% y-o-y), Exports (-0.1% y-o-y) and Imports (+1.6% y-o-y). Export growth seems weak currently.

“Gold prices now below US$1550/ounce”
The spot price for gold traded on the NYMEX (New York Mercantile Exchange) is currently  below the US$1550/troy ounce level. The weak global economic sentiment may lead to an increased demand in gold investment products due to the “flight to safety” factor – gold is viewed as a safe and tangible investment product.

Tomei sells gold bars, gold coins and gold wafers (in denominations between 10g and 1kg). Gold wafers, gold bars and gold-based jewellery can be viewed as a viable inflation-hedge or long-term investment option. Consumers also have the option of investing in gold via commercial banks (via “gold investment accounts”) or multilevel-marketing companies that offer gold-based investment products (e.g. gold coins and gold bars). In some countries, gold-related investments could 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.

“GoldSilver2U generates strong interest”
In November 2011, Tomei had launched its GoldSilver2U.com website, which was specially designed for customers that were interested in pursuing gold and silver investment opportunities, including those that wish to hedge against inflation. Through the website, customers can buy and sell gold and silver at any given time and place. The website offers physical gold and silver purchases for a series of bars and coins ranging from 10 grams to 1kg at the best spot price. This website has been informative and beneficial to Tomei’s actual and prospective clients.

VALUATION/CONCLUSION
“We expect DPS level to be maintained” A first and final single tier 3.5 sen dividend per share (DPS), amounting to RM 4.85 million for the group’s FY11 had been declared and approved by shareholders in the group’s recent AGM. The dividend will be paid on 31st May 2012 to shareholders registered as at 18th May 2012. Currently, we expect that the group would maintain its DPS level for its FY12.

Thus far, Tomei (+6.7% YTD) has outperformed the KLCI (+2.0% 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 Tomei is not a particularly large market-cap
stock, this may put a dampener on its market visibility and trading volume. “Maintain Buy Call, with a cautious TP” Based on our forecast of Tomei’s FY12 EPS and an estimated P/E of 4 times, we set a FY12-end

Target Price (TP) of RM0.93. This TP represents a 16.3% upside from its current market price and reflects our cautious stance (given the weak external sentiment and weak gold prices). Our TP for Tomei reflects a P/BV of 0.63 times over its FY12F BV/share. Tomei’s P/E and P/BV valuations appear quite undemanding, while its dividend yield, ROE and net gearing are at reasonable levels.

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 has 5 major umbrella brands namely Tomei, My Diamond, TH Jewelry, Le Lumiere and Goldheart. The group has a diversified business model (in terms of segment and location), a reputable brand name, a wide product range, strong design expertise, a large retail network, a calculated expansion strategy. We believe that the group is still on the lookout for synergistic M&A opportunities within the industry. In terms of risk factors, Tomei does face routine risks from any economic downturn, consumer pessimism, uneven monthly sales (due to festive
seasons), stiff peer competition, rapidly fluctuating precious metals/gold/gem prices and foreign exchange rates.