MARC has affirmed its MARC-1ID/AID ratings on 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 the strength of the jeweller’s domestic franchise and liquidity while acknowledging challenges common to all domestic jewellers posed by declines in consumer confidence and real household income. Additionally, Tomei’s rising inventories and borrowings had limited cash generation in FY2007 and contributed 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, and the 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 63% 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 market in China. 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 contribute the bulk of Tomei’s total sales, at 93.5% of revenue in 2007 (2006: 92.9%). 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 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. For the nine months ended FY2006, the Group recorded a pre-tax profit of RM14.09 million excluding negative goodwill of RM14.80 million and a RM1.40 million gain on disposal of a property which had contributed significantly to ‘other income’.  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 to upgrade existing outlets. Net cash flow from operations (CFO) as at December 2007 deteriorated to a negative RM26.43 million from a positive RM1.30 million in FY2006 as a result of inventory building for its new outlets. Total inventory as at December 31, 2007 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 December 2007, still within the covenanted gearing cap of 1.20 times. Tomei’s liquidity is supported by its inventories of RM184.4 million which consist of readily marketable 42% gold ornaments and 56% jewellery, 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 volume as a result of a decline in demand 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.