Tomei Consolidated Bhd - 2008

MARC has affirmed its MARC-1ID /AID ratings on jeweller Tomei Consolidated Berhad’s (Tomei) RM100.0 million Islamic Commercial Paper/ Medium Term Notes (ICP/IMTN) Programme. The ratings carry a stable outlook. The ratings reflect the strength of Tomei’s domestic franchise and liquidity while acknowledging challenges common to all domestic jewellers posed by a contraction in consumer demand. Additionally, Tomei’s rising inventories and borrowings had limited cash generation in the financial year ended December 31, 2007 (FY2007) contributing to weaker cash flow protection measures. MARC believes that maintaining a strong and stable earnings profile will be challenging in the current environment.

The group’s principal activities include the design, manufacture and retailing of jewellery, as well as refining of gold and silver. Currently, Tomei operates 56 retail outlets with 51 outlets locally and 5 outlets in Vietnam. The group’s retail outlets are spread throughout Malaysia with 59% of its retail outlets in Kuala Lumpur and Selangor. The group ventured overseas in 2007, opening retail outlets in Vietnam and entering into a joint-venture with a Hong Kong-based jeweller to penetrate the Chinese market. Tomei’s target market of the middle to the upper-middle class segment is currently affected by rising inflation and shrinking disposable incomes. Tomei’s financial performance exhibits sensitivity to local demand conditions as local sales at 93.5% of revenue in FY2007 (FY2006: 92.9%) contribute the bulk of Tomei’s total sales. However, export and international sales have been rising and exhibit potential for further increases, going forward. The group embarked on an expansion drive in 2007 with the opening of twelve (12) new retail outlets of which three were in Vietnam.

As at FY2007, the group’s revenue rose to RM223.83 million as a result of higher sales volume and gold prices while recording a pre-tax profit of RM16.21 million. The group incurred hefty initial start-up and promotional  costs in relation to the setting up of new retail outlets, as well as significant expenditure for overseas  expansion  and  upgrading  of  existing  outlets. Net  cash  flow from  operations (CFO) as at December 2007 deteriorated to a deficit of RM26.43 million from RM1.30 million in FY2006 as a result of inventory build-up for its new outlets. Total inventory as at end FY2007 rose significantly by RM57.05 million to RM184.42 million, primarily debt funded. This was reflected in an increase in total borrowings by RM42.54 million to RM101.17 million. Tomei’s debt to equity ratio reached 0.99 times as at end FY2007 but is still within the covenanted gearing cap of 1.20 times. Tomei’s liquidity is supported by its inventories of RM184.42 million which consist of readily marketable gold ornaments (42%) and jewellery (58%), which are adequate in relation to Tomei’s short-term debt of RM89.72 million.

While a moderate decline of the domestic market is unlikely to materially affect Tomei’s creditworthiness, MARC is concerned that any severe drop in sales could prevent cash flow protection measures from recovering to adequate levels required to sustain the current ratings. A sharp deterioration in demand levels and/or an intensification of competition could lead to a revision of the stable outlook.

Principal Activity

The group’s principal activities include the design, manufacture and retailing of jewellery as well as refining of gold and silver.

Major Rating Factors

Strengths

• Well-established and large retail network in its home market;
• Integrated manufacturer and retailer of jewellery; and
• Strong financial flexibility.

Challenges/Risks

• Decreased consumer demand as a result of lower real disposal incomes;
• Rising raw material prices could affect historic profit margins; and
• Establishing a meaningful retail presence outside its home market.