Tomei Consolidated Bhd - Outlook appears challenging

INVESTMENT MERIT

-  A roller-coaster ride. The share price of Tomei jumped 10% to hit RM0.79 within a week after our first report (RM0.72) dated on 13 Sept 2012. It has since retreated in tandem with the broad market selldown. Its unexpected disappointing set of 3Q12 results, which was released on 14 Nov 2012, has added more pressures to its share price, which closed at RM0.675 yesterday, close to the year’s low of RM0.65. 

-  Dismal 9M12 results. Tomei recorded a 9M12 net profit of RM14.2m, which made up only 42% of our full-year projection. The disappointing result was mainly due to 1) an unfavourable product mix (higher composition of gold sales that generally have lower margins as compared to jewellery) which led to the gross margin dipping by 6.3ppt YoY; 2) the unfavourable gold price coupled with a higher degree of price volatility; 3) higher operating costs as a result of new store openings and the closing of existing stores and 4) higher finance costs.

-  Outlook appears challenging.  The group’s outlook appears challenging in our view judging from the current high degree of volatility in the gold price and a persisting higher opex arising from its outlets rationalisation plan. In 3Q12, the higher gold selling prices did not translate into better profit margins for the group due to a timing mismatch and we do not discount that such a case may be well repeated in the future too. 

-  Cut to Trading Sell.  In  light  of  the  anticipated  operational headwinds, we recommend investors to sell the stock. Post- results, we have trimmed our Tomei’s FY12-FY13 net profit projections lower by 49% and 41% to RM17.3m and RM24.2m respectively. Based on the revised EPS forecasts of 12.5 sen and 17.5 sen, Tomei is trading at FY13 PER of 3.9x, in line with the industry’s average PER of 4.4x.

COMPANY UPDATES

-  In 9MFY12, Tomei opened twelve new outlets, which are located at Setia Mall, Paradigm Mall, Alor Star Mall, Mentakab Star Mall, Johor Premium Outlet and Aeon Ipoh, Ampang Point, Bintang Mall, Aeon Seri Manjung and Plaza Merdeka. At the same time, three stores were closed.

-  Going forward, two new outlets are expected to be opened in Sarawak and Perak in 4QFY12 and beyond that, management will focus on refurbishing the existing outlets.

-  As for the group's overseas network, Tomei will be undertaking various A&P initiatives to grow its sales in China and Vietnam.

TECHNICALS

-  Resistance: RM0.69 (R1), RM0.74 (R2)

-  Support: RM0.65 (S1), RM0.57 (S2)

-  Comments: Just two weeks ago, Tomei broke below the crucial falling wedge support line at RM0.69. With the move, the technical picture has become undoubtly bearish. Look to sell into strength closer towards the aforementioned support-turnedresistance level (RM0.69). 

BUSINESS OVERVIEW

-  Tomei Consolidated Berhad is an integrated jewellery designer, manufacturer, wholesaler and retailer. The group was founded in 1968 and has since grown its retail network to 74 outlets and 5 retail brands locally. The five retail brands under Tomei consists of Tomei, My Diamond, T.H. Jewelry, Le Lumiere and Goldheart, each varying in target market. 

-  The group also has a direct presence in Vietnam (since 2007) and China (since 2009). Currently, Tomei has 7 retail kiosks and a manufacturing faclity in Vietnam, and 9 kiosks in China.  

GEOGRAPHICAL SEGMENTS

-  Tomei Consolidated Berhad derives its revenue from four main geographic segment, ie. Malaysia, Vietnam, China& Hong Kong, and export markets. 9M12 revenue breakdown by geographic segments were: 

-  Malaysia (93.4%)

-  Export Markets (4.4%)

-  China & Hong Kong (1.9%)

-  Vietnam (0.3%)

Source: Kenanga