Luxury watch boutique owner Hour Glass Ltd (SGX: AGS) has been an outstanding winner in Singapore?s stock market over the past 10-plus years.
Since the start of 2005, Hour Glass?s shares have marched significantly higher by 733% to S$0.84 today, leaving the 53% returns delivered by the Straits Times Index (SGX: ^STI), Singapore?s market barometer, sorely in the dust.
Can Hour Glass carry on winning? Here are five reasons why it may.
1. It?s a simple business
Hour Glass owns mono-brand and multi-brand boutiques across the Asia Pacific region selling luxury watches from prominent players in the high horology scene like Patek Philippe…
Luxury watch boutique owner Hour Glass Ltd (SGX: AGS) has been an outstanding winner in Singapore’s stock market over the past 10-plus years.
Since the start of 2005, Hour Glass’s shares have marched significantly higher by 733% to S$0.84 today, leaving the 53% returns delivered by the Straits Times Index (SGX: ^STI), Singapore’s market barometer, sorely in the dust.
Can Hour Glass carry on winning? Here are five reasons why it may.
1. It’s a simple business
Hour Glass owns mono-brand and multi-brand boutiques across the Asia Pacific region selling luxury watches from prominent players in the high horology scene like Patek Philippe and Rolex. That’s a simple business which does not entail the need for much technology to operate.
There’s value in keeping things simple, as my colleague Morgan Housel wrote in a 2012 article of his on how the cigarette maker Altria was literally the best stock to own in the U.S. from the 1950s to the early 2000s:
“The biggest risk to any company over the long term isn’t that it won’t be able to grow earnings fast enough; it’s that it will go extinct. If you think in years instead of months, sustainability can be far more valuable than picking the next breakthrough.”
With that being said, Hour Glass’s management does have to keep an eye on how the future of high-end watch retailing might evolve. And to that point, investors may be able to rest assured that these thoughts are at the forefront of the minds of Hour Glass’s management.
2. It has a great culture
Hour Glass seems to have a great workplace culture in place, given what Dr. Henry Tay, Chairman of the company, wrote in the firm’s 2012 annual shareholder’s letter (emphasis mine):
“The executive committee and I spend many hours debating the compensation and welfare of our team members, especially ensuring that those at entry level positions in the company can take home enough to comfortably support themselves and their families. I was surprised but happy to hear from our Managing Director for Singapore, that the head of an international luxury brand had commented to her that they could not afford to hire The Hour Glass retail staff because they were amongst the best rewarded in the industry.
This is reflected in our Group staff turnover rate where the average tenure of employment is 9 years. We believe in the ideals of a corporate family, in the value of human relationships and we will stick with our trusted team members through the good times and bad.”
In late 2014, Hour Glass’s general manager in Malaysia, Mr Yon Shee Guan, passed away suddenly. That was a very unfortunate incident, but Hour Glass was able to fill the role from its own ranks without having to make any outside hires. This can be seen as a sign of strength in Hour Glass’s culture too.
3. It’s a consistent business
Billionaire investor Warren Buffett prizes a consistent track record of profitability in a company when he’s out looking for investing opportunities. This is an area in which Hour Glass has a decent showing.
Source: S&P Capital IQ
Hour Glass’s in the business of luxury watch retail, which is deemed to be discretionary; in other words, it’s the type of business which will suffer first in recessionary times. But as you can see in the chart above, Hour Glass’s revenue has seen consistent growth over the past decade with only two years of slight year-on-year declines despite the occurrence of the Great Financial Crisis of 2008-09 during the period.
The profit picture is a little messier, with a sharp dip in profit in the fiscal year ended 31 March 2009 (FY2009). But, Hour Glass’s bottom-line has still displayed an unmistakable upward climb over the years.
4. It’s financially strong
Interest rates may be climbing soon in the future and that’s a source of worry for companies that have debt-laden balance sheets. Hour Glass, on the other hand, can sleep easy at night given its strong finances.
As of 30 June 2015, the firm has S$74.5 million in cash and equivalents and just S$62.7 million in total borrowings.
5. It has a tailwind on its back
Hour Glass’s growth is tethered to the Swiss watch industry at the moment and that’s a nice tailwind to have for the company given that the Swiss watch industry had nearly octupled in value from CHF2.8 billion in export terms in 1980 to CHF21.8 billion in 2013.
Meanwhile, changes to the economic and demographic landscape of Asia in relation to the West can also create opportunities for Hour Glass to capture more value. Here’s how Dr. Tay eloquently puts it in Hour Glass’s 2015 annual shareholder’s letter (emphasis mine):
“Even with its multitude of domestic challenges, in 2015, China displaced the United States as the world’s largest economy. Additionally, the combined wealth of Asian highnet-worth individuals will for the first time in modernity, exceed those HNWIs in America.
By 2022, China’s middle class will have grown to 630 million, half its population, and by 2030, Asia will account for two thirds of the world’s middle class. Five years from now, the number of Mainland Chinese travellers will double to reach 200 million per annum, increasing the absolute quantum of the travel retail spend.
Such tectonic shifts in the centre of the world’s economic power and gravity of wealth pose an incredible opportunity for luxury businesses such as ours. But that does not mean that our journey will not be fraught with multiple speed bumps.”
A Fool’s take
There are many things to like about Hour Glass as a potential investment. But, there are some risks to be aware of. Chief amongst those is the issue of value.
At Hour Glass’s current price, it’s trading at 9.9 times its trailing earnings. That’s a fair bit lower than the price-to-earnings (PE) ratio of 12.7 that’s carried by the SPDR STI ETF (SGX: ES3). Given that the SPDR STI ETF tracks the fundamentals of the Straits Times Index, Hour Glass can be said to be cheaper than the broader market in Singapore and that’s a good thing.
But, it must also be noted that Hour Glass’s average PE ratio of 7.4 over the past five-plus years since the start of 2010 is significantly lower than the PE of 9.9 that is currently seen.
Even the best companies can become a poor investment if bought at too high a price. Investors ought to carefully weigh the risks and rewards with Hour Glass before any investing decision can be made.
Want to talk more about Hour Glass? If so, you can come meet David Kuo and the rest of the Fool Singapore team on August 15!
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing doesn’t own shares in any companies mentioned.