Is it worthwhile to invest in The Hour Glass?

On 12 August 2016, luxury watch retailer, The Hour Glass, delivered a set of poor financial results for 1Q2017. Year-on-year, revenue dropped a whopping 7% to $149 million and profits after tax declined 23% to $8.3 million for the first quarter of FY2017. At the back of many investors’ mind should be the question of whether is it worthwhile to invest in The Hour Glass now?

To be fair to the management, The Hour Glass has one of the strongest balance sheets for a listed SGX stock. The current assets amounted to $426 million, while cash and cash equivalents stood at $80.6 million. The current assets could more than offset the current and long term liabilities easily.

The Net Current Asset Value Per Share (NCAVPS) was $0.568 per share. This means that if The Hour Glass is to be liquidated, this will be the amount of tangible value per share after paying off the short term and long term debts. Net Asset Value (NAV) per ordinary share was $0.63.

For The Hour Glass, my estimation for the intrinsic value of each share is $0.66. This is because the Group holds a substantial amount of investment properties valued at $64 million according to the latest financial statement. Factoring this property asset into the NCAVPS, The Hour Glass’ true value should be $0.66, which is very near the current trading price of $0.72.

Given that The Hour Glass’ share price is currently fully valued, it may be very tempting to enter this counter. However, investors should realize the kind of headwinds that The Hour Glass is facing. The continuing global economic uncertainty is expected to sour consumer’s buying appetite for luxury watches. So as the company navigate through this storm, expect many choppy tides and rough waves. It is not going to be a smooth sail for investors of The Hour Glass.

I don’t have much knowledge on luxury watches but The Hour Glass’ annual report revealed a lot of useful insights on the global shift in trend for this sector. Broadly, the slow-down of China economic growth is expected to see contraction of luxury watch retailers’ network by up to a staggering 40%. This is a painful consolidation for the industry as the global economy continues to re-balance and growth is not expected to be rosy.

Notably, the management team of The Hour Glass has changed recently to adapt to the change in client demographic. Millennials now constitute over 45% of the team while Gen Xers 45% and Baby Boomers 15%. Clearly, the management envisage the potential purchasing power of the next generation and make it a point to “disrupt” themselves before others disrupt them.

Lastly, The Hour Glass is cognizant of the power of technology and how it can change consumer’s pattern. The advent of online comparison apps will impact branding and drives the flow of shoppers.

As The Hour Glass undergo a transition cycle, it is a big unknown whether the management is able to transform itself successfully in this new economy. It is not going to be business as usual for sure and whether the business will continue to be profitable will depend a lot on its management execution.

My strategy is to enter this stock at $0.60.

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Magically yours,

SG Wealth Builder