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

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...&oq=hour+glass+court&aqs=chrome.2.69i57j0l5.6256j0j1&sourceid=chrome&ie=UTF-8

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).