INVESTMENT MERIT

- Cautious view remains unchanged. We attended TOMEI’s analysts briefing recently with our cautious view unchanged. To recap, TOMEI recorded a 4Q12 net profit of RM34k, which brought the full-year figure to RM14.2m. This was significantly lower than our expectations, making up just 82% of our full-year projection of RM17.3m.

- The painful trade-off. The 54.3% YoY contraction in the FY12 net profit (from RM31.2m in FY11) was disappointing, particularly against the backdrop of a 15.4% rise in the group’s revenue of RM583.2m. Management’s efforts in driving revenue growth through new outlet openings and aggressive promotions have indeed shown the desired results. This, however, came at the expense of a lower net profit margin, which declined by 380 bps to 2.4% in FY12 as compared to 6.2% a year ago.

- Margin erosion. The lower net margin was due to a combination of factors, including: 1) a higher composition of gold sales that have lower mark-ups as compared to jewelleries; 2) the unfavourable gold prices coupled with a high degree of price volatility and hence a lower gross margin achieved and 3) higher operating costs incurred as a result of seven new outlet being opened in the year.

- Exclusive franchise agreement. While the higher composition of gold sales has translated to a progressive decline in the gross margins over the years (FY09: 34.6% vs. FY12: 24.5%), we see an avenue for TOMEI to expand its higher-margin jewellery business. Management has previously expressed its interest to grow its jewellery segment. The group, for example, has entered into an exclusive franchise agreement (7+7years) for the right to retail De Beers jewellery under the De Beers brand name in Malaysia in December 2012.

- Opportunity to penetrate the regional markets. The group has also been given the first right of refusal to take over De Beers’ an outlet in Singapore as well as the opportunity to set up operations in Indonesia, Thailand and Vietnam. Nevertheless, the details are still sketchy at this juncture, and thus, we have yet to impute any contribution from the De Beers tie-up in our FY13 forecast earnings.

- Lowering our projection. Post-FY12 results, we have trimmed out FY13 net profit projection from RM24.2m to RM20.2m to reflect its higher than expected operating cost. We remain cautious on the stock for now since TOMEI’s operational headwinds will likely continue in FY13. We do not have a rating for TOMEI for now but will take a relook at the stock should its outlook improve. TOMEI is currently trading at a FY13 fwd. PER of 4.8x and at a PBV of 0.5x.

TECHNICALS

- Resistance: RM0.75 (R1), RM0.80 (R2)

- Support: RM0.65 (S1), RM0.57 (S2)

- Comments: TOMEI’s share price appears stuck within a downtrend. The technical indicators are still bearish at the moment, and there has yet to be any signs that the downtrend may reverse. Only a decisive breakout above the 75 sen channel resistance would trigger a fresh perspective on the stock.

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 71 outlets and six retail brands locally. The six retail brands under Tomei consists of Tomei, My Diamond, T.H. Jewelry, Le Lumiere, Goldheart and De Beers, each targeted at specific demographics.

- The group also has a direct presence in Vietnam (since 2007) and China (since 2009). Currently, Tomei has seven retail kiosks and a manufacturing faclity in Vietnam and 11 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. Its FY12 revenue breakdown by geographic segments is as follows:

- Malaysia (93.0%)

- Export Markets (4.7%)

- China & Hong Kong (2.0%)

- Vietnam (0.3%)

Source: Kenanga