Luxury watch retailer Hour Glass Ltd (SGX: AGS) just reported a 19% increase in profit on the back of a 4% increase in revenue. Do such eye-popping results make it a good investment?
Is the increase in revenue a one-off, or can the group continue to sustain its growth? To determine this, I took a look at the macro trends surrounding the luxury watch industry in Asia, where Hour Glass operates its network of shops.
The chart below shows Swiss watch exports to its five biggest markets over the last three years.
As you can see, the two markets that have seen the most growth are Hong Kong and China. With greater spending power, Asia is expected to drive most of the growth in the luxury watch industry.
Hour Glass’ chairman, Henry Tay, noted in his letter to shareholders:
“Looking forward, whilst we expect continuing geo-political tensions and volatile stock markets, and so anticipate an overall deceleration in the growth of Swiss watch exports to approximately 3% for 2019, all major watch producers realise that Asian demand will remain the key driver of growth for the next decade and beyond. In response, they are deliberately channeling merchandise to the countries where true demand originates. Where we sit, so long as we continue to collaborate with the right partners, we are cautiously optimistic the ensuing years will bode well for the Group.”
With its network of shops around Asia, Hour Glass can ride on the growing demand for luxury watches in this region.
The key risk for the group is a sustained decline in demand for luxury watches in the markets in which it operates. A full-blown trade war, resulting in a sustained recession, could potentially cause this. As luxury watches are considered discretionary items, consumers will likely cut their spending on these items if and when a recession hits.
However, the risk of a full-blown recession remains low. Recessions also tend to be short-lived. Even if a recession occurs, Hour Glass has plenty of cash on its books to see it through a few difficult years. I also believe demand for luxury watches will likely return when the economy returns to growth.
An assessment of a stock will not be complete without considering its valuation. Based on its current share price of S$0.80, Hour Glass has a price-to-earnings ratio of around 8 and trades at a 2.5% discount to its net asset value of S$0.82. Considering that Hour Glass can continue to ride the increasing demand for luxury watches in Asia, its current valuation looks like a real bargain.
Investors should also take note that as of 30 June 2019, Hour Glass had S$190.8 million in cash and equivalents and just S$17.5 million in debt. Its net cash alone makes up slightly more than 30% of its total market value.
The Foolish bottom line
Despite a recent run-up in its share price and the risk of a recession, Hour Glass still looks like a compelling buy. The group has a long track record of earning a profit and has a robust balance sheet that will see it through any near term challenges. Along with macro-trends that suggest the luxury watch market in Asia is expected to rise, Hour Glass at its current valuation looks like a bargain in my books.
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 owns shares in Hour Glass Ltd.