The Motley Fool

Is Cortina Holdings Limited Undervalued?

Cortina Holdings Limited (SGX: C41) is a luxury watch retailer and wholesaler. The group was established in 1972, building up a network of more than 20 outlets in Singapore, Malaysia, Thailand, Hong Kong, and Taiwan.

With demand for luxury watches seeing a resurgence over the last 15 months, I decided to take a quick look at Cortina’s business and valuation.

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Financial track record

Cortina has a steady record of profitability. While demand for luxury watches slowed in 2016 and 2017, the surge in demand for reputable brands in 2018 and the first half of 2019 has benefited Cortina. The chart below shows Cortina’s revenue and net profit between March 2013 and March 2018.

Source: Cortina website

As you can see, after a fall in profit in 2015 and 2016, the company has returned to growth. In the year ended 31 March 2018, Cortina recorded a 19.3% rise in revenue and a staggering 84.8% increase in profit after tax.

Moreover, in its most recent results from the period ending 31 March 2019 (not shown in graph), Cortina also reported a 31% increase in earnings per share, extending its streak of growth.

Trading below book value

Despite the resurgence in demand for luxury watches providing a significant tailwind for the group, Cortina still trades at a fairly low valuation.

At the time of writing, Cortina shares traded at S$1.19 per share. However, its net asset value per share was S$1.206 per share. This means Cortina trades at a slight discount of around 1.3% against its book value.

Significant cash on its balance sheet

On top of that, Cortina has plenty of cash on its balance sheet. As of 31 March 2019, the group had a net cash position of S$57.3 million, which makes up around 29% of its entire market capitalisation.

If you strip the cash away, Cortina has an enterprise value of around S$139.7 million. That translates to just 3.0 times its recurring EBITDA (earnings before interest, tax, depreciation, and amortisation) for FY2019.

Rewarding shareholders

Net assets per share have risen from 84.9 Singapore cents in March 2014 to 120.6 Singapore cents as of March 2019.

More impressively, that growth in net assets has been achieved while the company dished out dividends each year.

Most recently, Cortina proposed a final dividend of two Singapore cents and a special dividend of 3.5 Singapore cents. Based on the share price of S$1.19, the dividend per share translates to a respectable yield of 4.6%.

The Foolish bottom line

Investors may be shunning Cortina due to the volatile nature of luxury watch demand. Luxury watch retailers may also have stiff competition and limited pricing power, as shoppers can easily choose to patronise other retailers.

Nevertheless, Cortina Holdings has done extremely well to grow its business over its 46-year lifetime and has a rock-solid balance sheet, which should provide it with the financial power to see itself through any challenging periods.

Despite the erratic demand for luxury watches, I believe Cortina’s solid track record, strong financial position, and current low valuation could make it a decent long-term winner.

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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 contributor Jeremy Chia does not own shares in any of the companies mentioned.