By Ranjit Singh

POH Kong Holdings Bhd, the country’s largest jewellery and gold retailer with 94 branches, stands to gain from the growing appeal of gold as a safe haven asset among investors. The escalation in geo-political risks and the outbreak of the Wuhan coronavirus have further accentuated this appeal.

Poh Kong’s shares hit a 52-week high on Jan 8 at 70.5 sen amid gnawing tensions between the US and Iran after the US carried out the assassination of Iran’s military chief Gen. Qasem Soleimani and Iran’s attack on US military bases in Iraq.

Gold prices breached the psychological level of US$1,600 per ounce on Jan 8 – its highest level since March  2013 – when tensions rose as investors sought cover in the safe-haven metal after Iran fired rockets at an Iraqi airbase which hosts US forces, hours after the funeral of an Iranian commander whose killing in a US drone strike has raised fears of a wider conflict in the Middle East.

Stephen Innes, chief market strategist at Axicorp, tells FocusM that the rally in gold prices still has more legs.

“I think gold would trade towards the US$1,700 per ounce level as it has more appeal as a safe haven asset regardless of the state of affairs, even if the coronavirus spread peaks,” he adds.

Gold is seen as an attractive asset class and investment portfolio among consumers as well as investors. The World Gold Council (WGC) recommends a gold holding of between 2% and 10% in one’s portfolio value to achieve a well-balanced and diversified list of investment.

Gold stocks are typically more appealing to growth investors than to income investors.  Increases in the price of gold are often magnified in gold stock prices. 

A relatively small increase in the price of gold can lead to significant gains in the best gold stocks and owners of gold stocks typically obtain a much higher return on investment (ROI) than owners of physical gold.

Record profits for Poh Kong in 1Q2020

For its first quarter results ended Oct 31, 2019, Poh Kong reported a jump in earnings boosted by higher gold prices, despite lower sales. Net profit in 1QFY20 surged 155% to RM8.08 mil compared with RM3.16 mil a year ago despite a 20% decline in revenue to RM205 mil.

“The group is positive the demand for gold-related products will remain resilient amidst global uncertainties that have encouraged many consumers to change their investment portfolio from equities to gold,” Poh Kong said in a filing with Bursa Malaysia.

The decline, it felt, was mainly due to a decrease in demand for gold jewellery products during the quarter under review.

“The soaring gold prices have a positive impact on our bottom line. Sales of gold inventory at the current retail price pushes the margin higher as inventories were procured at lower prices, resulting in the Group’s improved profit in the first quarter,” said the company in an e-mail response to FocusM.

On Feb 5, Poh Kong’s shares were trading at 56.5 sen which represented a 140% discount to its net tangible asset (NTA) of RM1.36 per share for the period ended Oct 31, 2019. 

The company has a high holding of inventories at RM591 mil which can be easily liquidated. Its  shares have been trading at a PE of 7.5 times.

The business dynamics

For FY 2020, it plans to open one to two stores with a capital expenditure of RM3 mil to RM5 mil each, including inventories per store. 

Poh Kong has been adopting proactive business strategies and improved systems and processes to streamline its operations in efforts to enhance customer’s shopping experience.

To respond to the changing business landscape, the company has streamlined its supply chain management department with a new system, from ordering to replenishment, and inventories management to capture sales data in real time. 

This innovative platform has enabled Poh Kong to quickly respond to changes in customers’ demand and spending behaviour, resulting in a reduction in purchasing and manpower costs as well as easier procurement and monitoring of inventories.

With all the data analytics in place, the company will be able to improve stock turn, learn of new trends in the marketplace and gain better consumer insights to make more informed decisions. 

Besides these systems, Poh Kong has also invested in its physical setup by improving on its merchandise displays and upgrading its stores regularly to add value for customers with a fresh change and a more focused retail experience of its brands.

Among the activities undertaken to promote the company’s products are advertising and promotion, road shows and events to reinforce the Poh Kong brand name in the marketplace.

Poh Kong has upgraded its website design and web tools to enhance the consumer viewing experience and understanding of its brands and collections as the company stays relevant to customer needs.

For online shoppers, Poh Kong collections are available at Malaysia’s e-commerce sites – Lazada, Shopee and Prestomall. Sales from online shops grew more than 60% in 2019.

Poh Kong carries international luxury brands – Schoeffel from Germany as well as Luca Carati and Moraglione 1922 from Italy – and many fine jewellery pieces from all over the world in its Poh Kong Gallery collection.

In saying that the company passes on any increase in gold prices to its buyers, it notes that based on its study of purchasing patterns, demand does not dampen with the higher prices as retail investors tend to buy gold wafers and bars when gold prices are on an upward trend.      

The study also showed that people buy gold for commemorative purposes regardless of the prices.

Poh Kong expects gold prices to hover around US$1,600 and US$1,700 per ounce this year compared to an average of US$1,500 in 2019.

On the outlook for the company in 2020, Poh Kong says it is confident that demand for gold and gold-related products will remain resilient.

“Gold is seen as an attractive asset class and investment portfolio among both consumers and investors. Poh Kong is optimistic that Malaysia’s economic growth will improve progressively although retail sentiments are soft due to the higher cost of living and cautious consumer spending.  

“Notwithstanding the volatility of gold prices, Poh Kong will find solutions in overcoming industry challenges, expand at a moderate pace at strategic locations, constantly monitor its costs and overheads prudently and review its operational process to improve the group’s efficiency and performance,” it asserts. – March 5, 2020