Tomei Consolidated Bhd - 2009

MARC has affirmed its MARC-1ID /AID ratings of Tomei Consolidated Berhad’s (Tomei) RM100.0 million Islamic Commercial Paper/ Medium Term Notes (ICP/IMTN) Programme. The ratings carry a stable outlook. The affirmed ratings reflect Tomei’s significant jewellery-chain operations in the local jewellery market, its integrated operations that have allowed the company to offer a wide product range through established delivery channels, and its adequate liquidity position. These strengths are moderated by stiff competition in the industry, exacerbated by weak economic environment that may lead to weaker earnings, the impact of which will be softened by cost reduction measures such as the closure of underperforming outlets.

Bursa Malaysia-listed Tomei is involved in the design, manufacture and retailing of jewellery, as well as refining of gold and silver. With 56 retail outlets locally, of which about 60% is located in the Klang Valley, the group is the second largest domestic jeweller in terms of retail outlets. The group has also expanded its operations abroad since 2007 to mitigate effects of a saturated domestic market mainly through a retail kiosk concept. Tomei has five retail kiosks in Vietnam and has recently opened another three in China. Retail kiosks minimise the initial capital outlay compared to retail outlets. International sales are at the early stage of development and remain a small portion of total revenue. The group is cautious on its expansion plans in light of the weak economic conditions and has streamlined its stores by closing down non-performing outlets and rechanneling the resources to more profitable sites, both local and overseas.

For the financial year ended December 31, 2008 (FY2008), Tomei recorded a 29.3% growth in revenue to RM289.4 million and 30.5% increase in pre-tax profit to RM21.2 million. Its operating margins firmed to 9.53% (FY2007: 9.38%) on account of higher gold prices and sales volume from the addition of five new retail outlets in 2008. Cash flow protection measures returned to positive territory as reflected in CFO  interest  cover of 3.22 times  in FY2008  as  compared  to -7.59 times in FY2007  when  inventories increased by a hefty 45% to RM184.23 million over the preceding year to cater for then planned  expansion of retail outlets. As at end FY2008, inventories rose by a moderate 6.2% to RM195.78 million, a major portion of which consists of readily marketable gold jewellery (52%) and gold bars (10%) that is sufficient to cover its short-term debt of RM83.42 million (FY2007: RM89.72 million). Tomei’s debt-to-equity (DE) ratio declined to 0.92 times as at end FY2008 (FY2007: 0.99 times), well within the covenanted level of 1.2 times.

For the first quarter ended March 31, 2009 (1QFY2009) revenues declined to RM65.08 million (1QFY2008: RM70.29 million) while pre-tax profit fell to RM4.9 million (1QFY2008: RM8.8 million). This was attributed to lower sales from the wholesale segment, expenditures related to the opening of new stores in the quarter and higher unrealised foreign exchange gains recorded in 1QFY2008 following the strengthening of the Ringgit against the USD.

The stable outlook considers measures taken by management to address the current economic downturn. Its initiatives to improve sales productivity of existing retail outlets and pare down debt should help to offset the negative impact of the current economic environment.

Major Rating Factors

Strengths

Challenges/Risks