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

THE HOUR GLASS LIMITED (SGX:AGS)

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 (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.

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.

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.

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 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 as we peg our valuation to a forward P/E of 13.5x (versus initial 14.5x) in lieu of ongoing macroeconomic uncertainties. We note that a forward P/E ratio of 13.5x is aligned with ~ 15% discount to The Hour Glass’s global peers.
See
Since our initiation report, The Hour Glass's share price has risen by ~16%. We reiterate our view of a moderation in revenue in FY23F, on the back of continued macroeconomic uncertainties.

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