MARC has assigned respective short- and long-term ratings of MARC-1ID and AID with stable outlook to Tomei Consolidated Berhad’s (TCB) RM 100.0 million Islamic Commercial Papers/Medium-Term Notes (ICP/IMTN) Programme. The ratings reflect the Group’s well-established jewellery franchises, its competitive edge over non-integrated players as an integrated manufacturer and retailer of jewellery; its capable management team; and the relatively strong financial flexibility afforded by its highly liquid inventories and unutilised standby credit lines and facilities post-drawdown of the ICP/IMTN Programme, as well as moderate market entry barriers in the manufacturing and retail sub-sectors of the domestic jewellery industry. The ratings are however, tempered by the competitive pressures inherent in the retail jewellery business, and consequent thin net profit margins; and TCB’s higher gearing upon full drawdown of borrowings. Underpinning the stable outlook is the stable revenue and profit contribution of its major subsidiaries namely, Tomei Gold & Jewellery Manufacturing Sdn Bhd (TGJM) and Tomei Gold & Jewellery Holdings (M) Sdn Bhd (TGJH). The potential upside to its long-term rating is constrained by the threat of more affordable alternatives and substitutes, i.e. costume jewellery, and exposure to the price fluctuations of major raw materials such as gold.

Through its subsidiaries, TCB primarily engages in the design, manufacturing and retailing of jewellery. TCB offers a wide range of gold and gemstone jewellery to meet the demands of different market segments and income levels, as reflected in the various designs sold under brandnames such as Tomei, My Diamond and TH Jewelry. TCB’s jewellery mainly caters for the local market. Jewellery sales continue to be dependent on the health of the economy, particularly changes in personal disposable income and consumer confidence, and are highly seasonal. In 2005, domestic sales accounted for about 98% of the Group’s revenue while export sales contributed the remaining 2%. The Group conducts its local retail sales through its network of 43 outlets and 1 kiosk throughout Peninsular Malaysia (mostly in Kuala Lumpur and Selangor) under the differentiated brand names of Tomei (32 outlets), My Diamond (10 outlets) and TH Jewelry (3 outlets); and through another retail kiosk in Vietnam. 

The Group’s consolidated pro-forma revenue in FY2005 stood at RM161.7 million, a 10.0% increase over the previous financial year’s pro-forma revenue of RM147.0 million. Sales generation was aided by the opening of new outlets during FY2005, and retail price increases on the back of higher gold prices. For the past three financial years, operating profit margins have been relatively stable, increasing marginally year-on-year from 10.1% in FY2003 to 11.22% in FY2005 on account of cost efficiency gains.

The Group’s negative Cash flow from Operations (CFO) Interest Coverage for FY2005 (pro-forma) reflected an increase in inventories namely, gold and jewellery stocks arising from the opening of six new outlets in 2005. Although MARC’s sensitivity analysis found the Group’s cash flow projection to be robust, cash flows will likely experience some strain in the final year of the Programme with the bullet repayment of the ICP.

Based on the 12-month unaudited interim results as at 31 December 2006, TCB’s gearing stood at 0.62 times. The pro-forma gearing of the Group is anticipated to increase to 1.07 times upon full drawdown of borrowings. MARC believes that the finance-to-equity ratio limit of 1.20 times at the Group level as provided by financial covenants of the ICP/IMTN Programme will impose some form of debt management discipline on the Group.