TOMEI: The gold rally

High gold price. Fuelled by anticipation of an imminent interest rate cut by the Fed, the global gold price has experienced a significant rally in March, reaching a record high of $2,195 per oz before mildly retracing $2,182 per oz yesterday. This surge has not only sparked interest in gold-related counters like TOMEI but also propelled their share prices upward. While a sustained high gold price may have limited long-term impact on TOMEI due to the eventual balancing effect of higher ASP to offset increased gold restocking costs, the current regional gold price spike presents a short-term boon for TOMEI. This is primarily due to the temporal discrepancy between existing inventory and the elevated gold price, resulting in margin expansion. TOMEI's strategy of consistently replenishing inventories without speculation on gold prices reinforces this benefit. Consequently, the recent surge in the global gold price is poised to drive margin expansion for TOMEI until the older inventories are fully sold.

Upcoming Hari Raya to boost sales.  In addition to the buoyant gold price, TOMEI is strategically positioned for robust sales during the upcoming Hari Raya period, historically driving sales for the company's 916 gold products. This, coupled with the margin expansion previously discussed, is anticipated to yield strong results for 2QFY24. Noteworthy is that TOMEI is currently trading at a trailing 4.3x P/E, significantly lower by 57% compared to its 10-year average of 10x. The combination of undemanding valuation, coupled with the excitement surrounding earnings from the festive season and the buoyant gold price, should lead to a re-rating in the share price, we reckon.

A strong breakout Yesterday's strong breakout above its previous high of RM1.40 coupled with expanded volume is poised to propel the share price towards the RM1.52-1.59-1.67 region. Cut loss at RM1.28.

Collection range: RM1.33-1.36-1.45

Upside targets: RM1.52-1.59-1.67

Cut loss: RM1.28

Source: Hong Leong Investment Bank Research - 12 Mar 2024