Tomei Consolidated Bhd - 2010

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 rating outlook is maintained at stable. The affirmed ratings took into consideration Tomei’s profitable and established domestic fine jewellery chain operations, management’s regional growth strategy and the overall stability of its earnings in a more challenging economic environment. Tomei continues to generate cash flows consistent within current ratings, helped by moderate growth in working capital needs and lower capital spending. The company’s long-term rating is constrained by its high working capital requirements, which is characteristic of fine jewellery retailing, and the keen competition it faces within the fragmented domestic jewellery sector. MARC notes that in view of this, the company has taken steps to expand into regional markets with higher growth potential.

Bursa Malaysia-listed Tomei is involved in the design, manufacture and retailing of predominantly fine gold jewellery, although it has in recent years increased the composition of gemstones in its product mix. The company has 56 domestic retail outlets as at end-December 2009, making it the second largest jewellery retail network in Malaysia. Of this, approximately 60% of its retail outlets are located within the Klang Valley region under different store names such as “Tomei”, “My Diamond”, “T.H. Jewelry” and “Le Lumiere”, which are categorised by product range for different market segments. The competition within its domestic market has prompted Tomei to venture into higher margin products such as diamonds and other gemstones. The bulk of Tomei’s revenue is generated in the Klang Valley region, although in the medium term MARC expects increased contribution from its operations outside the Klang Valley and overseas where it has opened eight retail outlets in Vietnam and three in Shanghai, China. The company will add two more retail outlets in Vietnam and three in China in fiscal 2010. MARC views the move to expand to these fast-growing economies as positive given the limited growth potential in the domestic market.

For financial year ended December 31, 2009 (FY2009), Tomei registered a 4% growth in its revenue to RM300.89 million from RM289.4 million in FY2008, mainly driven by improved sales and higher gold prices in the year. Gold and gold-related products remain the mainstay of its business with about 60% contribution to revenue. Tomei’s operating profit margin has improved marginally to 10.8% (FY2008: 9.5%) on account of a change in its product mix. Tomei’s cash flow metrics continued to strengthen with its net cash flow from operations improving to RM18.84 million in FY2009 (FY2008: RM12.12 million). For the first quarter ending March 31, 2010 (1QFY2010), revenue rose by 34.7% to RM87.65 million from RM65.08 million in the previous corresponding period underpinned by continued demand for gold and jewellery products as well as improved contribution from new retail outlets and the wholesale market.

The group’s leverage position has improved with the gearing level falling to 0.79 times as at December 31, 2009, (FY2008: 0.92 times; FY2007: 0.99 times). As of March 31, 2010, its debt-to-equity ratio further improved to 0.71 times as a result of a recent private placement exercise of up to 12.6 million shares of RM0.50 each, which translated to an increase in shareholders’ funds of RM6.3 million. MARC expects the group’s gearing position to improve further following Tomei’s upcoming repayment of its RM10 million IMTN in June 2010, for which it has set aside RM10 million in the sinking fund.

The stable outlook is premised on MARC’s belief that Tomei’s credit quality should continue to hold up well. Any positive rating action is likely to hinge on further strengthening of Tomei’s balance sheet and key credit protection measures.

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