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KGI initiates 'outperform' on The Hour Glass with TP of $2.32

Khairani Afifi Noordin
Khairani Afifi Noordin • 3 min read
KGI initiates 'outperform' on The Hour Glass with TP of $2.32
KGI Research has started coverage on luxury watch retailer The Hour Glass with an “outperform” recommendation and a TP of $2.32.
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KGI Research has started coverage on luxury watch retailer The Hour Glass with an “outperform” recommendation and a target price of $2.32.

The target price is based on a discounted cash flow model, taking into account a weighted average cost of capital rate of 10.5% and terminal growth rate of 2%, according to analyst Megan Choo.

Choo points out that The Hour Glass’s revenue rose 63% y-oy-y to $472 million for the half year ended Sept 30, 2021, while net profit surged 110% y-o-y to $63.5 million in 1H22. This is mainly due to improved gross margins at 29.3% in 1H22, compared to the previous period at 26.2%.

The Hour Glass’s bottom line was boosted by an increase in share of results of associates, which doubled to $6.6 million in 1H22. As a result, basic and diluted earnings per share for 1H22 more than doubled to 8.95 cents compared to 4.22 cents in 1H21.

The company is poised to benefit from the demand for luxury goods. “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,” says Choo.

After growing 4% between 2019 and 2021, Bain & Company estimates luxury goods sales to increase from 283 billion euros in 2021 to between 300 billion euros and 310 billion euros in 2022.

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Geographically, Southeast Asia and Oceania contribute over 80% to The Hour Glass’s total revenue. Among Southeast Asian countries, The Hour Glass has the largest presence in Singapore with close to 20 boutiques, while Thailand and Malaysia are ranked second with close to 10 boutiques in each country.

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.

Residing in a cyclical industry, The Hour Glass’s retail trade business is shielded from inflation and interest rate hike fears, says Choo. “Rising costs are easily passed down to consumers as demand continues to remain strong. Enhanced innovation and new designs are reigniting demand across luxury goods, enabling pricing opportunities in the marketplace and lowering resistance.

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“Luxury goods companies have also more tightly aligned inventories to demand forecasts to ensure that there continues to be much less reduced pricing, with discounting often phased out,” she adds.

Key risks for The Hour Glass include exchange rate risks due to overseas operations; supply chain woes that might persist moving forward into 2022; as well as Covid-19 uncertainties, which may lead to worsening of state or border restrictions.

As at 10.26am, shares in The Hour Glass are trading 2 cents higher or 0.97% up at $2.07.

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