The Hour Glass – Digitalise or Die

At a backdrop of lower revenue and lower profit after tax, The Hour Glass has proposed a first and final dividend of 2 cents. At current closing price of S$0.66, this translates to a dividend yield of 3.03%. I am not surprise by the financial results but I was surprised by how well The Hour Glass manages the economic downturn.

We all know that The Hour Glass deals with luxury watches and given the current economic headwinds, the company should do very badly. But it didn’t.

The management reduced the company’s debt to equity ratio from 14.4 percent to 10.7 percent.

FY2017 FY2016 FY2015 FY2014 FY2013
Debt/equity ratio (%) 10.7 14.4 15.0 10.9 12.5

The company’s free cash flow is still positive with hoards of cash. The Hour Glass has a free cash flow of 57 million.

FY2017 FY2016 FY2015 FY2014 FY2013
Free Cash Flow ($’000) 57,113 10,453 (13,026) 53,066 1,505

Below is a quick glance of its financials. Revenue fell by 2%.

Profit after tax fell by 7%.

Net Asset Value (“NAV”) increased by 9% most likely after reducing its debt.

Omni-Channel Strategy

In the annual report, The Hour Glass mentioned about Omni-Channel Strategy. This is the first time I heard of such term. I googled for the term “Omni-Channel Strategy”.

Omnichannel is a cross-channel business model that companies use to improve their customer experience. – Wikipedia

Companies that use omnichannel contend that a customer values the ability to be in constant contact with a company through multiple avenues at the same time. – Wikipedia

The Hour Glass will be rolling out their customer experience management platform in September.

Summary

The management of The Hour Glass seems to know the impact of digital watches (android and apple watches) against traditional watches or luxury watches. At this moment, I am not sure if the customer experience management platform will have an eCommerce component to compete with online shopping platforms such as Qoo10 or Shoppee. My personal opinion is that The Hour Glass is still at the early stage of digitalising its business and I hope it is on the right track.

In the event The Hour Glass is able to transform its business, this should unlock further value within this company. The Hour Glass currently makes up 4% of my stock portfolio.

 

 

Headwinds Continue for The Hour Glass 1H 2017

The Hour Glass Logo

From the 1H FY2017 financial results below, we can see how much the current economic downturn has hurt the luxury business. On a positive note, the Group’s balance sheet remains robust with consolidated net assets of $444.2 million with cash and cash equivalents of $85.3 million.

Unaudited 1H FY2017 Results

For the Period ended:

3 Sep ’16

$’000

30 Sep ’15

$’000

Change %
Revenue 311,298 334,659 (7%)
Profit Before Taxation 21,734 25,049 (13%)
Profit After Taxation 16,885 20,722 (19%)
Earnings per Share (cents) 2.34 2.85 (18%)

The Hour Glass has businesses in Singapore, Hong Kong, Japan, Australia, Thailand and Malaysia. Read More

How The Hour Glass Manages a Downturn

The Hour Glass Logo

We all know the luxury watch industry is cylindrical. With the luxury watch market facing headwinds, The Hour Glass announced a decline in net profit after tax by 10% for the financial year ended 31st March 2016.

What I like about the The Hour Glass is their prudent management. In the current market downturn, the senior management team brainstorm for ways to transform the way they do their business. The team looked at ways to achieving operational efficiency by performing an internal review of company policies and processes.

These are some of the steps taken by the management:

1. Fix Legacy Systems

By reorganizing the data and approval flow for payroll, The Hour Glass is able to save over 30 man days every year.

2. New Employee Development Initiative

The Hour Glass introduced new employee development initiatives aimed at retail succession and creating multiple career pathways for sales personnel to remain committed to the organization. What I noticed about The Hour Glass is the senior management is made up of majority of staff above 60 years old. Millennials make up 40% of the organization’s team composition. GenXers make up 45% and Baby Boomers make up 15%.

Personally, I can see the importance of laying a career path for the younger generation in order to retain them with the company. We all understand how costly it is to lose staff you have trained over the years.

3. Upgrade Technology Platforms

The Hour Glass will upgrade the current technological platforms and base ERP (Enterprise Resource Planning) infrastructure to achieve better operational efficiency. Currently, luxury watches are only sold in traditional physical stores. Perhaps we may see online platforms offering online sale of luxury watches?

4. Prepare for Contingency

The management foresee that access to funding may be curtailed in the coming years due to softening economy. Thus, they have worked with banks to prepare extra lines of credit. They have launched a $500 million medium term note programme in the event The Hour Glass needs to respond to any opportunity that may arise in the coming years.

Currently, The Hour Glass makes up 4% of my stock portfolio. Estimated 2.5% dividend yield. Vested for dividend + growth.