Value investors are investors who aim to invest in companies that are trading at a big discount to their real economic value.
In this article, I will like to point out two reasons why value investors may find Hour Glass (SGX: AGS) an interesting candidate for further research.
As a quick introduction, Hour Glass is in the retail business, dealing specifically with luxury watches. It has a network of over 40 boutiques across Asia Pacific in Singapore, Malaysia, Thailand, Japan, Hong Kong, and Australia. The company is an official retailer for some of the world finest watch brands, such as Audemars Piguet, Cartier, Hublot, IWC, Patek Philippe, and more.
A low valuation
I mentioned earlier that value investors aim to invest in companies that are trading at a big discount to their real economic value.
One way to gauge Hour Glass’s valuation is to compare its price-to-earnings (PE) ratio and price-to-book (PB) ratio with the market’s. I will be using the SPDR STI ETF (SGX: ES3) as a proxy for the market, since the SPDR STI ETF is an exchange-traded fund that tracks the fundamentals of Singapore’s market barometer, the Straits Times Index (SGX: ^STI).
With a stock price of S$0.645, Hour Glass has a PE ratio of 9.0, which is lower than the SPDR STI ETF’s PE ratio of 12.0. Meanwhile, Hour Glass has a lower PB ratio compared to the SPDR STI ETF (0.92 vs. 1.28). These valuation measures suggest that Hour Glass is trading at a discount to the broader market.
A strong balance sheet
A value stock must also be able to withstand the ups and downs in economic conditions or the business cycle in order to give itself time for its value to be recognised by the market.
And in order to have the robustness to endure the bad times, the company must have a strong balance sheet so that it can satisfy the financial requirements of its operational needs, such as paying interest, repaying debt, dishing out dividends, and more.
Generally speaking, a company with a strong balance sheet will have plenty of cash, and a reasonable net debt (total borrowings less cash) to equity ratio of not more than 100%.
Coming to Hour Glass, its balance sheet had S$146.1 million in cash and investments, and debt of just S$51.7 million, as of 31 December 2017. So, it’s clear that the luxury watch retailer has a strong balance sheet.
A Foolish conclusion
From all the data above, we can see that Hour Glass has a relatively low valuation, and a robust balance.
Though these traits are positive, investors should also consider the other side of the equation. Stay tuned for more in the coming days, as I’ll be sharing the negative traits of Hour Glass from the perspective of a value investor. [Editor’s note: An article discussing the negative traits of Hour Glass has been published. It can be found here.]
The Behind-the-Scenes Story on Motley Fool Singapore’s Biggest Winner Ever
Members of David Kuo’s personal investing club Stock Advisor Gold were recently rewarded with the biggest winner Motley Fool Singapore has seen to date – an 88% return in just 19 months! In a special, 100% FREE report we’ve put together, we take you behind the scenes to show you exactly how we first uncovered this stock… every article and piece of research we released on it… and what ultimately led to our decision to SELL for an 88% gain. Click here to claim your copy!
The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Lawrence Nga doesn’t own shares in any companies mentioned.