(Stocks Discussion) SGX: Hour Glass Limited (SGX: AGS)? - Seedly
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Anonymous

Asked on 07 May 2019

(Stocks Discussion) SGX: Hour Glass Limited (SGX: AGS)?

Discuss anything about share price, dividends, yield, ratios, fundamentals, technical analysis and if you would buy or sell this stock on the SGX Singapore markets. Do take note that the answers given by our members are just your opinions, so please do your own due diligence before making an investment!

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Isaac Chan
Isaac Chan, Business at NUS
Level 8. Wizard
Updated on 07 Jun 2019

Business Profile

The Hour Glass is a luxury watch retail groups with an established presence of 40 boutiques in 11 key cities in the Asia Pacific region. The Hour Glass’ network of multi-brand and standalone boutiques are all strategically located in the key luxury retail corridors of Singapore, Kuala Lumpur, Bangkok, Phuket, Ho Chi Minh, Hanoi, Hong Kong, Tokyo, Sydney, Melbourne and Brisbane.

Growth Profile

I have a few concerns regarding this company.

Firstly, luxury watches have taken to online retailing, which The Hour Glass has not explored yet. This could be due to the exclusive distribution agreement they have with the different watchmakers.

Secondly, the demand for luxury watches has been propped up by Chinese consumers. However, The Hour Glass does not have a physical retail presence in China yet.

Thirdly, there seems to be a change in consumer taste for watches, as smartwatches and fitness watches are increasingly popular, as cited by several studies.

My fourth reasons are similar to that of the second and third. I'm worried that The Hour Glass has not responded to such changes in the retail environment yet. This could either reflect the lack of management foresight or the restrictions by placed on The Hour Glass.

The reasons I mentioned probably led to the low revenue growth that The Hour Glass has. In fact, revenue CAGR since 2015 was less than 1%.

Estimates

Moving forward, I project that CAGR for the next 5 years would be negative 2%, due to the reasons I mentioned earlier. I also don't believe that The Hour Glass has strong competitive advantages, that set it apart from other luxury watch retailers. Part of it could be due to the nature of the business that it is in since there doesn't seem to be much value add that they bring to customers.

I project that operating margins would also decrease, mainly due to the reduced economies of scales but also due to high fixed costs involved.

I also lowered the Sales/Capital ratio to reflect the fact that the same amount of capital is still required to support declining sales.

The cost of capital for the firm due to the slightly lower cost of debt and low leverage. As the firm matures, I leave the cost of capital lower during the later years to reflect the servicing of debt and lower cost of equity.

During the stable period, I gave the revenue zero growth rate. I still think that there is a place for luxury watches in the offline retail space.

I gave the firm a 30% probability of failure, in which case 50% of the current book value of capital will proceed to shareholders. I gave this probability as there is a chance that

Valuation

I thought that I was pessimistic enough with such a valuation, but the target price that I received was still showed that the shares were undervalued!

I am not entirely sure how the market has been pricing the shares, but given a very conservative outlook I took, I might be buying The Hour Glass.

Piotroski F-Score

The F-Score for this stock is 8 out of 9! Hence, it has also attained a positive rating independent from my valuation. It also has a Price/Book ratio of less than 1 (0.98).

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Tracy Lim
Tracy Lim
Level 5. Genius
Updated on 07 Jun 2019

TL;DR

Here to update with The Hour Glass Limited (Hour Glass) ‘s latest financial results. Financial year-end for Hour Glass is 31 Mar 2019. In short, net profit increased by 41%. Cash flows are healthy. P/E ratio of 7.75 makes it worthy to look at.

Business overview

The Hour Glass (“Hour Glass”) is a leading luxury watch retail group, holding brands like Rolex, Patek Philippe and Audemars Piguet. Their multi-brand boutiques are all strategically located in Singapore, Malaysia, Australia, Thailand, Japan and Hong Kong. Expert team of experienced sales consultants will guide and assist customers through the watch buying experience and they strive to provide customers with an exceptional timepiece.

Financial results

As of today, their annual report is not out yet, but unaudited earnings are released. Results below are based on figures given in their unaudited earnings. Information is limited to what they released.

The increase in profits is mainly attributed to:

  • Revenue rising 4% to $720.9 million. There is steady growth across its regional retail network. (Maybe with negative market outlook, people start buying watches for investment...)

  • Share of results of associates

Balance Sheet

  • Current assets did not change much from 31 Mar 2018.

  • Do note that Hour Glass has Investment properties as well. For their assets, PPE went up but investment properties went down. This could be due to revaluation differences on top of selling off/acquiring properties. (more info can be found after they release their financial report.)

  • Their cash is very high. (But then again... why are they keeping so much cash? They need to better manage their cash and inventory)

Share price

The share price is $0.77 as at 6 June 2019. This gives a P/E ratio of around 7.75. Beta is 0.47, and is relatively less volatile to the market.

Dividends paid = 21,150.3564‬

Dividend paid is 3.00 cents in 2019, an increase from 2.00 cents one year ago.

The dividend payout ratio is 21,150.36/71,404, about 29.6%, an increase from about 28% the previous year.

Free cash flow

FCF = 66,045 - 18476 - 638 = 46,931‬

Bank loan repayable in a year = 12951 + 2021 = 14,972

FCF = 46,931 - 21,150.3564‬ - 14972 = 10,808.64‬ (‘000)

Free cash flows is positive (healthy)

Positives:

  • Dividend payout sustainable (and increased dividends too)

  • Free cash flows positive

  • High inventory of watches

  • Financials pretty strong

Concerns:

  • Certain watches in their inventory are classified as timeless pieces, but there are inevitably those that are seasonal and may become outdated. This could then cause a write-off of inventory, meaning a lower value in inventory even though those watches are still there.

  • Revaluation of Investment Properties can affect profit significantly

  • Prospective shifts in global geopolitics and economics continue to cast concerns over the positivity of consumer sentiment amongst watch buyers.

Conclusion

P/E ratio is pretty low, and this stock seems undervalued. However, there is high uncertainty in the markets and they expressed concerns on their sales in the near future. The valuation prices are all dependent on whether or not they can keep up with similar revenue.

It is a stock I will monitor and wait till more information is released but currently, I am pretty ambivalent about this stock and there isn't any strong inclination to buy right now. Especially when luxury watches are big ticket items and the frequency of purchase is generally low. If you're interested in this industry, you can check out Cortina Holdings too for consideration (P/E ratio currently is 6.72) which we talked about before.

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Billy Ko
Billy Ko
Level 7. Grand Master
Answered on 08 Jun 2019

Thanks to both Tracy and Issac for doing the indepth analysis of Hour Glass's financials!

However, despite having such rosy numbers and outlook, Hour Glass isn't doing well in a holistic sense in the aspect of it's management. It's co-founder has been in a couple of court cases and although it's for personal matters but I reckon would affect the image of the company to a slight extent.

https://www.google.com/search?q=hourglass+court+case&oq=hour+glass+court&aqs=chrome.2.69i57j0l5.6256j0j1&sourceid=chrome&ie=UTF-8

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