The Hour Glass - KGI Securities 2022-02-17: Time Is Money

THE HOUR GLASS LIMITED (SGX:AGS)

The Hour Glass - Time Is Money

The Hour Glass is a specialty luxury watch retail group with multi-brand and standalone boutiques in the Asia Pacific Region. The group also owns Watches of Switzerland, a watch retail chain in Singapore that deals in mid-tier to high-end Swiss timepieces.
Power in luxury goods. Bain & Company estimates that luxury goods spending will hit record levels in 2022, while price hikes for luxury products will continue to occur, with some hitting double-digit increases.
Asia’s consumers to spearhead global consumption growth. Offering a US$10 trillion opportunity, Asian consumers are expected to account for half of global consumption growth in the next decade, according to estimates by McKinsey.

Quick recovery from COVID-19. Swiss watch exports hit a 5-year high in 2021, representing a gain of 31.4% y-o-y. On the consumption side, Singapore’s retail sales recorded a blockbuster growth in 2021, snapping a 3-year losing streak. Meanwhile, retail sales in both Malaysia and Thailand are on a path of recovery and are almost back to pre-pandemic levels.
Initiate coverage on The Hour Glass with OUTPERFORM rating and S$2.32 target price.

The Hour Glass (SGX:AGS) is one of the world's leading specialist watch retailers with an established presence of 50 boutiques in 12 key cities in the Asia Pacific region. The Hour Glass’s network of multi-brand and standalone brand boutiques are all strategically located in the key luxury retail corridors in Singapore, Hong Kong, Tokyo, Sydney, Melbourne, Brisbane, Auckland, Kuala Lumpur, Bangkok, Phuket, Hanoi and Ho Chi Minh.
The Hour Glass also owns Watches of Switzerland, a watch retail chain in Singapore that deals in mid-tier to high-end Swiss timepieces.

The Hour Glass's revenue rose 63% y-o-y to S$472mil for the half year ended 30 September 2021 (Year-end 31 March 2022) while net profit after tax surged 110% y-o-y to S$63.5mil in 1H22. This was mainly due to improved gross margins at 29.3% in 1H22 compared to the previous period at 26.2%.
Bottom-line was boosted by an increase in share of results of associates which doubled to S$6.6mil in 1H22. As a results, basic and diluted EPS for 1H22 more than doubled to S$0.0895 compared to S$0.0422 in 1H21.

With travel and social gatherings still limited in many parts of the world, the shift from spending on experiences to goods is likely to stick around for another year. After growing 4% between 2019 and 2021, Bain & Company estimates luxury goods sales will increase from €283 billion (S$428 billion) in 2021 to between €300 billion (S$454 billion) and €310 billion (S$469 billion) in 2022.

Geographically, Southeast Asia and Oceania (Australia and New Zealand) contributes over 80% to the company’s total revenue. Singapore registered strong growth in consumer spending power despite the ongoing pandemic, evident from the retail sales index for watches and jewellery reaching a 5-year high in December 2021. Thailand and Malaysia on the other hand, are expected to catch up in 2022 with the reopening of foreign borders.

The Hour Glass’s retail trade business has largely been resilient in the face of inflation running the hottest in almost 40 years. Rising costs are easily passed down to consumers as demand for luxury items continues to remain strong.

We initiate coverage on The Hour Glass with an Outperform recommendation and a target price of S$2.32. Our target price is based on a discounted cash flow, taking into account a WACC rate of 10.5% and terminal growth rate of 2%.
We used a discounted cash flow model with a conservative set of assumptions to obtain the target price of the company. We applied a 10.5% WACC rate with a 2% terminal growth rate.
Base case valuation: We derive a S$2.32 fair value for The Hour Glass in our base case valuation based on the discounted cash flow until year 5.
Bear case valuation: We assumed a 20% lower free cash flow from FY2023E to FY2026E in our bear case valuation with a WACC of 10.5% and terminal growth rate of 2%. The bear case valuation results in a target price of S$2.04 for The Hour Glass.

The Hour Glass's revenue is projected at a growth rate of 8% in FY22, given the company’s strong first half results. For FY23 onwards, we used a 3% growth rate, which is near the 4% historical growth rate of the company’s revenue. The Hour Glass’s gross profit margin has been growing at a healthy pace, from 24.2% in FY18 to 29.2% in FY21. We used 1H22’s gross profit margin of 29.3% to project cost of sales for FY22 onwards.
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Megan Choo KGI Securities Research | https://www.kgieworld.sg/ 2022-02-17

SGX Stock Analyst Report OUTPERFORM INITIATE OUTPERFORM 2.32 SAME 2.32