Poh Kong ... Oct11

By Mercury Securities Sdn Bhd

Poh Kong’s 4Q/FY11 results (quarter ended 31st July 2011) were generally slightly above our earlier expectations.

“Strong Q4 performance”
Poh Kong's revenue of RM183.1 million during 4Q/FY11 was higher by 38.8% y-o-y versus the corresponding 4Q/FY10. The increase in revenue was partly attributed to the effect from the group’s 35th Anniversary promotional activities and also the increase in gold price on top of its existing stores registering higher sales. The group's 4Q/FY11 net profit after tax (NPAT) of RM12.2 million was higher by 56.4% y-o-y.

“Best Ever” full year results
The group achieved FY11 revenue of RM692.5 million, which we believe is their highest ever full year revenue. FY11 revenue was higher by 23.4% y-o-y. The group also achieved its “record NPAT” of RM41.6 million, which was higher by 28.0% y-o-y.

OUTLOOK/CORP. UPDATES
Poh Kong’s management plans to continue its drive to build market share by enhancing and differentiating its product offerings to its targeted market segments. The group actively evaluates various initiatives and opportunities to attract new customers through the introduction of new product lines/designs and enhanced customer service.

“Domestic Demand still holding well”
Malaysia had reported reasonably stable CPI of 3.3% (August 2011) and unemployment rate of 3.0% (2Q/2011). In early September 2011, Bank Negara Malaysia (BNM) had maintained its overnight policy rate (OPR) at 3.0%. According to BNM, Malaysia’s 2Q/2011 GDP rose by 4.0%, following a revised 4.9% GDP growth in 1Q/2011. A steady economic growth would also lead to higher consumer optimism and hence assist to raise domestic consumption, including spending on retail gold or jewellery products.

Malaysia Retailers Association (MRA) said in its latest Malaysia Retail Industry Report, that local retailers saw sales rise by 9.1% in the April-June 2011 (2Q/2011) period as they offered attractive discount to lure shoppers. Malaysia’s retail sales growth has been revised upwards to 6.5% from 6.0% previously, following an encouraging 8.2% growth in 1H/ 2011. This growth will bring estimated total retail sales for the year to RM82 billion. Retail sales grew 8.4 % in 2010, with total sales value estimated at RM77 billion. Nevertheless, rising costs and discounts may see retailers' profit margins being squeezed.

“Gold Prices – above US$1600/ounce”
Reflecting concerns in Europe, the spot rate for gold traded on the NYMEX (New York Mercantile Exchange) has dropped to around US$1635/troy ounce after reaching a high of around US$1921/troy ounce recently. According to the World Gold Council, robust gold market fundamentals, including evidence of stronger demand for gold jewellery in China and India, have continued to support gold prices. Gold plays a role in hedging and has been regarded as a safe, long term investment that provides protection against unforeseen risks in the economic cycle.

Large jewellers like Poh Kong do have revenues coming from sales of gold bars, though its management has not given any guidance on the quantum. Gold bars, which are 999.9% pure gold, are available in 1g, 5g, 10g, 20g, 50g and 100g weight denominations. Gold wafers are sold in the denominations of 25g, 50g and 100g. More often than not, gold jewellery are bought largely for ornamental usage e.g. for wedding dowry, ceremonial/formal functions and as gifts to spouses or close family members.

Besides gold wafers, gold bars and gold-based jewellery, there are also other gold-investment options. Consumers nowadays have the option of investing in gold via commercial banks (via “gold investment accounts”) or even via MLM (multilevel-marketing) companies that may offer gold-based investment products (e.g. gold coins and gold bars). In some countries, gold-related investments could also be done via gold ETFs (exchange traded funds), gold certificates and gold-based derivatives.

Currently Poh Kong has no plans to expand its outlets to overseas locations. In terms of revenue, about 80% of Poh Kong’s revenue is derived from gold, with the remainder 20% from gem stones (e.g. diamonds). From the gold-revenue segment, about 75% is derived from yellow-gold sales while 25% is from white-gold sales. The ‘Malay and Indian’ market clientele traditionally prefers yellow-gold based ornamental products.

Poh Kong practices the 4 core business principles of quality, value, trustworthiness and choice, to target its market segments. This incorporates values such as design, craftsmanship, reputation, and competitive pricing. The group constantly evaluates its operational efficiency/costs, capital expenditure, outlet-expansion plans, gearing, cash flow needs and gold inventory levels. The group constantly selects stores to refurbish and also find strategic locations for outlets across the country which has the best potential for higher revenue growth and consumer demand. On the marketing side – the group’s intensified efforts in A&P (especially during festivals), merchandising and product launches, sponsorships and road shows during the year would help to maintain the group’s market leading position.

In May 2011, Poh Kong announced a proposal to undertake an Islamic Commercial Papers/Islamic Medium Term Notes (ICP/IMTN) Programme (up to RM150 million in nominal value), to be guaranteed by Danajamin Nasional Berhad. Pursuant to this announcement, Danajamin Nasional Berhad will provide a guarantee facility to Poh Kong’s payment obligations under the proposed ICP/IMTN Programme.

VALUATION/CONCLUSION
“Consistent DPS but dwindling Dividend Payout Ratio”

Poh Kong’s board of directors (BOD) had proposed a first and final dividend per share (DPS) of 1.4 sen single tier for its FY11 ended 31st July 2011. The proposed dividend will be subject to shareholders' approval at the next AGM to be held on a date to be announced later. The entitlement and payment dates for the dividends would also be announced later. Poh Kong’s future dividends would be largely determined by the performance and cashflow needs of the group. We note that the group’s dividend payout ratios have been dwindling over the past few years due to its constant annual DPS despite of its rising earnings.

Even with an adjusted beta (correlation factor) of 0.76 to the KLCI, Poh Kong (-18.4% YTD) had underperformed the KLCI (-8.7% YTD) this year. Market conditions have also been volatile in recent months, impacted by the political uprisings in the Middle East/North Africa, debt ceiling issue in the US, sovereign debt issue in Europe and the Tohoku disaster in Japan. As Poh Kong is not a particularly large market-cap stock, this may put a dampener on its market visibility and trading volume.

“Upgrade to Buy Call”
Based on our forecast of Poh Kong’s FY12 EPS and an estimated P/E of 4.5 times (within its historical range), we set a FY11-end Target Price (TP) of RM0.53. This TP offers a 32.1% upside from its current market price, and represents an upgrade to a Buy Call. This upgrade is due to its price being near to its 52-week low and also the improved results. Our TP for Poh Kong reflects a P/BV of 0.56 times over its FY12F BV/share. Meanwhile, the local “Clothes & Accessories” sector’s average P/E and P/BV is 9.3 times and 0.8 times, respectively.

“Poh Kong – a Value Buy”
We find that Poh Kong’s FY12F P/E and P/BV valuations are very undemanding, while it has reasonable net gearing ratio, dividend yield and ROE. We are pleased with Poh Kong’s positive performance during its FY11. Nevertheless, the group also face routine business risks such as any future economic downturn, consumer pessimism, uneven monthly sales (due to festive seasons), fluctuating raw material prices and foreign exchange rates and strong competition from its peers. Going forward, the group’s upside would be largely dependent on its management’s marketing and growth strategy, and also on the overall economic conditions.