The Hour Glass - DBS Research 2022-05-30: Only Time Will Tell


The Hour Glass - Only Time Will Tell

  • The Hour Glass's FY22 record breaking year as expected, revenue aligned with expectations whilst net profit exceeded our estimates by ~30%.
  • Gross and net margins a surprise at 32.7% and 15.0% (vs. 29.2% and 11.0% in FY21A).
  • Uncertain macroeconomic outlook as the key headwind to discretionary spending in FY23F.

The Hour Glass's FY22 revenue in line.

  • The Hour Glass (SGX:AGS)'s FY22 revenue reached a record ~S$1bn (up 39% y-o-y), on the back of robust demand, notably from Malaysia and Australia. The group’s FY22 revenue growth was aligned with our expectations.
  • Positive earnings surprise, which exceeded our estimates by ~30%. The Hour Glass's FY22 net profit reached S$155m (up 88% y-o-y), which exceeded our initial estimates of ~S$120m by 29%. The positive surprise in FY22 net profit was driven by
    1. higher gross margins of 32.7% in FY22 (vs. 29.2% in FY21) – contributed by robust demand – and
    2. lower operating expenses of 14.3% of revenue (down from 15.1% in FY21).
  • FY22 net margins were at 15.0%, up from 11.1% in FY21.
  • Growth in dividend aligned with estimates. Given the group’s robust financials, The Hour Glass's FY22 dividend increased to S$0.08, up from S$0.06 in FY21A.
  • Going forward, we anticipate The Hour Glass will maintain its dividend at S$0.08, which translates into a steady FY23F dividend payout ratio of 42% and a steady implied dividend yield of 3.4%.
  • Strong balance sheet. The Hour Glass’s balance sheet remained strong with a net cash position, with cash and bank balances at S$323.4m.

Our views

Continued macroeconomic uncertainties a potential drag to revenue.

  • We reiterate our view in our initiation report, where we estimate a moderation in FY23F revenue in lieu of the ongoing macroeconomic uncertainties i.e., Ukraine-Russia conflict, impending interest rate hikes and more. Since 1997, we have observed that during periods of economic uncertainties, The Hour Glass’s revenue are typically impacted negatively.
  • In our view, we believe continued macroeconomic uncertainties, as well as recession/inflation fears could impact consumer confidence and subsequently lead to a slowdown in luxury goods spending in FY23F.

Resumption of travel-related spending.

  • In recent years, global luxury goods brands (including Hour Glass) has benefited from the surge in luxury goods spending within domestic markets, given the spillover spending from travel-related spending, according to Bain & Company.
  • In our view, the resumption of travel-related spending could reduce spending amongst locals on luxury goods.

GST hikes and border reopening could lend some support.

  • Though, potential frontloading of consumer spending ahead of the incoming GST hikes in Singapore (effective 1 Jan 2023/24) and the return of tourists with the reopening of travel borders could lend some support to sales. Though, we note that Chinese tourists make up ~ 20% of The Hour Glass’ sales; Given China’s current strict zero- COVID19 stance, we anticipate the return of Chinese tourists to only materialise over the medium to longer term.

We anticipate a slowdown in revenue and earnings in FY23F, a moderation from the record breaking year of FY22A.

  • We have assumed a -8% slowdown in revenue in FY23F. Separately, we have adjusted our gross and net margins estimates to 30% and 13.5% (versus our initial estimates of 29% and 12%), which is a moderation from the record high margins that were witnessed in FY22A, albeit higher than our initial estimates. Gross and net margins of ~30% and ~13.5% were also aligned with The Hour Glass’s average margins over the recent 3 years.
  • With these assumptions, our FY23F earnings forecasts for The Hour Glass are raised by 13%, predominantly driven by the change in our margin estimates. Though, relative to FY22 earnings, our revenue and earnings (pre ex.) estimate were down by 8% and 20% respectively, illustrating our view of a moderation in financials in FY23F.

We downgrade The Hour Glass to HOLD with target price of S$2.54.

Paul YONG CFA DBS Group Research | Singapore Research Team DBS Research | https://www.dbs.com/insightsdirect/ 2022-05-30
SGX Stock Analyst Report HOLD DOWNGRADE BUY 2.54 DOWN 2.620