1. 1QFY17 Results Highlight

• In 1QFY17, turnover grew steadily by 7.6% to RM185.47m. This was underpinned by stable demand for gold jewellery and higher retail gold prices. Additional booster came from contribution from new outlets.

• The gradual recovery in demand was sustained into 2QFY17 after first sign of growing turnover occurred in 4QFY16. On a quarterly basis, the company had been posting negative turnover growth since 4QFY15. Following the implementation of GST in Apr-15, this dampened market demand.

• The operating leverage helped to improve profit margins. The higher turnover resulted in PBT margin improving to 1.3% (1QFY17) from 0.3% (1QFY16). This is attributed to the nature of retailing business whereby certain expenses such as rental and staff are mostly constant.

• Consequently, net profit surged substantially from a mere RM0.34m (1QFY16) to RM1.77m (1QFY17)

2. Earnings Outlook

• PKHB is an integrated one-stop jeweller, from manufacturer to retailer of gold jewellery, gems, diamonds, precious stones and gold investment products in Malaysia. As at end-FY16, it operates 102 retail outlets located in shopping malls to sub-urban centres nationwide.

• FY16 was not a good year for PKHB where it reported a 24% decline in net profit. After the implementation of GST in Apr-15, PKHB has been recording negative revenue growth since 4QFY15 for quarter May-Jul-15 (financial year ending Jul). Coupled with weak consumer sentiment and spending, this dampened the demand for gold jewellery products. However, there was sign of recovery in revenue as it posted a positive topline revenue growth in 4QFY16. The growth momentum continued into 1QFY17. This could reflect the improving consumer demand and market sentiment.

• As at end-FY16, its store counts remained unchanged at 102 stores with opening of 5 new stores while 4 stores were closed. The pace of stores’ closure has slowed as 12 stores were closed in FY15. This is an ongoing exercise for PKHB to drive store’s productivity of its distribution network. Longer-term, the continuous store expansion will largely depend on the pace of development for new shopping malls in the areas PKHB operates in.

• Despite the weak sentiment, PKHB is continuing with its brand building activities via advertising, promotions, roadshows to create and reinforce awareness, innovative products at affordable prices. In this context, PKHB has won numerous awards including an 8th position among Malaysia’s Top 10 Retailers according to a research survey conducted by Retail Asia Publishing Magazine.

• PKHB also strives to widen its customer base with more affordable prices and good mix of jewellery products, including its inhouse brands.

3. Valuation and Recommendation

• We recognise the near-term operational uncertainty with regards to consumer spending, economic condition and volatility in gold price and ringgit. However, we believe that its depressed share price is not warranted weighed against its rich assets backing.

• We are maintaining our Buy recommendation on undemanding valuations ground. Share price of RM0.48 is still sharply below its book value of RM1.14, it is also lower than its cash backing (inclusive of gold inventory) of around RM0.84.

Source: BCT Asia Research - 13 Dec 2016