Not a gold mine for traders

Weakening demand seen for jewellery products

DESPITE gold being in vogue because of its safe haven status, not all gold manufacturers and traders are celebrating.

Gold is seen as a relatively liquid investment option. Nonetheless the business of selling and manufacturing gold products have become more difficult due to prices being on a roller coaster ride.

Gold prices are up 16.2% on a year-to-date basis at US$1,505.12.

In 2001, gold rose from US$255 per ounce to a high of US$1,906 a decade later, before falling to US$1,056 by December 2015. This reversal of fortunes had led debt-heavy gold companies, which had engaged in aggressive expansions and mergers, to initiate dramatic cost cutting programmes.

“This resulted in all-in sustaining costs declining 20% to US$879 an ounce between 2012 and 2017, and significant impairments totaling Us$129bil since 2011,” according to Mckinseys in an April 2019 report.

In Malaysia, the higher gold prices have been a natural boost for Poh Kong Bhd’s bottom line.

Net profit for its fourth quarter to July 31, grew 18% to Rm10.57mil despite revenue dropping 15% to Rm231.86mil on weaker gold jewellery demand.

Poh Kong intends to pay a first and final dividend of 1.2 sen. For the full year, its net profit expanded 11% to Rm25.88mil although revenue was flat at Rm1bil.

Nonetheless, Poh Kong alludes to a more difficult operating environment in its annual report.

Over the last few years, increasing competition has seen many gold companies reduce their outlets and undergo cost-cutting to stay afloat.

Not surprisingly on Wednesday, gold manufacturer and trader Degem Bhd told Bursa Malaysia that it was considering a privatisation exercise at RM1.10.

Shares of Degem Bhd which have been illiquid and staid over the last five years, saw its share price jump 24% to RM1.03 the following day, but only on volume of 78,700 shares.

This isn’t surprising considering the stock is tightly held and has a public shareholding of just 16.91%.

There are also no institutional investors in Degem.

Degem looking to exit Bursa

On Wednesday, Degem told Bursa Malaysia that it had received a letter from its major shareholder, Legion Master Sdn Bhd requesting the company to undertake a selective capital reduction (SCR) and repayment exercise.

The proposed SCR involves Degem undertaking a selective capital reduction and a corresponding capital repayment of a proposed cash amount of RM1.10 per ordinary share in Degem held by the entitled shareholders.

As at Sept 24, Legion Master and the persons acting in concert collectively hold 109.71 million shares of Degem, representing 83.09% of the issued share capital of Degem.

The proposed SCR is expected to be funded via existing cash balances and internally generated funds.

Legion Master and its PACS do not intend to maintain the listing status of Degem.

Degem has a public shareholding spread of 16.91%. With this exercise, it does not need to comply with the public shareholding spread requirement of 25%.

Considering Degem’s liquidity issues and lack of capital appreciation over the years, the exercise looks like a good opportunity for the shareholders to exit and realise their investments.

At RM1.10, this is a 16.29% to 33.9% premium based on Degem’s five day, to one year VWAP price range.

Furthermore, exiting the stock is not easy considering that it is an illiquid counter.

This daily average trading volume merely represents 0.06% of Degem’s free float of Degem.

Unexciting financials

The 35-year-old Degem brand caters for the mid to high-end segment of the consumer market.

It is also the sole distributor of the Lazare Diamond, Forevermarktm and Victor Mayer jewellery in Malaysia.

Degem’s performance has been on the downtrend over the last five years.

For comparison purposes, Degem recorded net profit of Rm18.18mil on the back of revenue of Rm219.52mil for its financial year ended Dec 31, 2014 (FY14).

For FY18, the company recorded a loss of RM30,000 on the back of revenue of Rm161.97mil. However, it is an asset rich company.

As at Dec 31, 2018, Degem owns some 14 properties ranging between five and 33 years, with a net book value of Rm49.56mil.

Degem has a net asset per share of RM1.90. This means that the stock is trading at 0.58 times the offer price of RM1.10.

For its second quarter to June 30, Degem recorded net profit of Rm2.75mil from RM98,000 in the same period of the previous year. Revenue dropped 9.38% to Rm34.49mil.

Nonetheless the better results were also due to a gain of Rm1.7mil arising from the disposal of an investment property.

Degem says gross profit margins improved and it lowered its operating costs as a result of retail outlets closure.

These are part of its rationalisation process.

Thus for the six-month period, Degem recorded a net profit of Rm3.25mil compared with a loss of RM778,000. Revenue was down to Rm68.36mil from Rm75.87mil previously.

As of June 30, the company has cash and cash equivalents of Rm50.45mil, which is a significant increase from the Rm23.32mil it had in the same period a year ago.

It has short term loans of Rm5.66mil and long term loans of Rm44.82mil.

In its filing with Bursa Malaysia, Degem says it expects the remaining of 2019 to be challenging as a result of rising costs and weak consumer demand.