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Thursday, 31 December 2015

Poh Kong’s profit margin should normalise once stocks are replenished at lower price

1. 1QFY16 Results Highlight

 In 1QFY16, topline turnover showed little sign of recovery, as it reported yet another 11.2% decline to RM172.30m.

 Consequently, both PBT and net profit also dropped by 89% to RM0.49m and RM0.34m respectively in 1QFY16.

 However, on a sequential basis, it recorded a small profit in 1QFY16 as compared with a net loss of RM5.05m in 4QFY15.

 Its turnover performance continued to be dragged down by challenging retailing market caused by the prevailing weak sentiment and rising cost of living as well as the normalisation of buying pattern after the implementation of GST in Apr-2015.

 In line with nature of retailing business, PKHB carries a relatively higher fixed cost in the form of staff and rental which amounted to RM111.69m in FY15 (14% of total turnover). As such, the decline in turnover has a more profound impact on its profitability due to lower absorption of costs.

 Its profitability is also susceptible to sharp fluctuations in gold prices between the time of purchases of gold and gold jewellery and its subsequent sales to consumers. Historical gold price (US$ per troy ounce)

2. Earnings Outlook 

 PKHB is an integrated one-stop jeweller, from manufacturer to retailer of gold jewellery, gems, diamonds, precious stones and gold investment products in Malaysia. As at end-FY15, it operates 101 retail outlets located in shopping malls to sub-urban centres nationwide.

 After years of store expansion, PKHB is putting in place cost control initiatives and streamlining its store network. The company is consolidating non-performing outlets to drive the productivity of individual store. Longer-term, the continuous store expansion will largely depend on the pace of development for new shopping malls in the areas PKHB operates in. As at end-FY15, PKHB has a total of 101 stores as compared with 106 stores (as at end-FY14). While 7 new stores were opened in FY15, it also closed 7 stores while another 4 stores were renovated and refurbished. In FY16, it plans to open another 3-5 stores with an estimated total capex including inventory of about RM3-5m each store.

 PKHB plans to drive a larger market share by enhancing and differentiating its product offerings to each target market segment.

 Its profit margin should normalise once its stock is replenished at prevailing lower market price, PKHB only keeps a gold inventory of 3-4 months.

3. Valuation and Recommendation 

 We have downgraded our earnings forecast for FY16 by 30% to reflect its lower stores count and weak market sentiment.

 However, we are still maintaining our Buy recommendation which is based on its strong asset backing. We still like its market-leading position, strong management team, wide retail coverage and strong branding.

 Valuations are undemanding considering its rich assets backing. Share price of RM0.56 is still sharply below its book value of RM1.12, it is also lower than its cash backing (inclusive of gold inventory) of around RM0.78.


Investment ratings:
Buy (generally >10% upside over the next 12 months)
Hold (generally negative 10% downside to positive 10% upside over the next 12 months)
Sell (generally >10% downside over the next 12 months)

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