Time to accumulate Tomei

Tomei Consolidated Bhd
(Dec 29, 70 sen)
Accumulate at 67.5 sen with target price of 90 sen: Tomei was listed on the then Second Board in July 2006, and was subsequently transferred to the Main Board in Sept 2007. Tomei was founded in 1968, and has evolved from a small enterprise into an integrated manufacturer and retailer of jewellery.

On the back of appealing gold and gemstone designs, Tomei has set up a total of 59 retail outlets in Malaysia, 10 kiosks in Vietnam and three in China, operating under the brand names of Tomei, My Diamond, TH Jewellery and Le Lumiere.

In 9MFY2010, revenue grew 21% year-on-year to RM263 million while profit after tax jumped 26% to RM16 million, driven by improved consumer spending and higher retail prices for gold.

Investor concern over the sustainability in demand for jewellery as well as margin pressures following the recent spike in gold prices is misplaced as Tomei retains the ability to pass down the rising cost of raw materials.

As Tomei adheres to a policy of purchasing gold on a constant basis, the group benefits when gold prices increase and vice versa due to the average-cost principle. In other words, the spread between the purchase and selling prices of gold increases as gold prices move up, thereby enhancing the group’s margins in the process.

Tomei’s share price tumbled 18% from a 52-week high of 79.5 sen (Nov 15) to 65 sen (Dec 9) before closing at 67.5 sen (50% FR) on Dec 28, which has fulfilled the minimum retracement target.

In view of the uptick in the momentum and trend indicators after recovering from the oversold territory, indicating that the odds will remain in the bulls’ favour as long as the price is held steady above the daily upper uptrend line (UTL) of 64.5 sen or 61.8% FR.

We are eyeing 70 sen (38.2% FR) as the immediate upside target, followed by the 74 sen (23.6% FR), and 80 sen (UTL of the weekly chart). A further run-up above 80 sen will spur prices higher to tough resistance zones of 85 and 90 sen. Immediate support levels are 64.5 and 63 sen (two-month low).

Tomei is trading at trailing 4.2 times price-earnings ratio (based on cumulative four-quarter earnings per share of 16.2 sen), which is greatly undervalued against its peers’ PER of 8.9 times.

Our six-month target price is 90 sen, implying a 5.6 times trailing PER, in line with Poh Kong’s PER of six times. Stop loss below 63 sen. — Hong Leong Investment Bank Research, Dec 29