The Hour Glass Increases Dividend For The First Time

The Hour Glass Store

The Hour Glass is one deep value stock that has been paying investors consistent dividends over the past decades. Currently, The Hour Glass makes up 3% of my stock portfolio. Despite the company holding lots of cash, The Hour Glass has been paying investors a consistent pay out of 2 cents over the past few years. With the recent runup in stock price from S$0.65 to S$0.82, I thought I share some updates that I read about on The Hour Glass.

The Hour Glass which deals with luxury watches has been suffering from the economy downturn over the past few years (2015 to 2018). Recently, The Hour Glass has announced a decent set of latest financial results and for the first time, proposed to increase its first and final dividend pay out from the usual 2 cents to 3 cents.

The group’s revenue climbed 4% to $720.9 million in FY2019 and profit after taxation rose 41% to $71.4 million. As you can see below, the financial results for FY2019 is excellent with debt being its lowest level at $15.0 million and a free cash flow of $47.0 million.

After experiencing sluggish demand for some years, the trend for luxury watches in Asia picked up and stabilised during the course of FY2019.

Financial Results FY2019 ($’000) FY2018 ($’000) FY2017 ($’000) FY2016 ($’000) FY2015 ($’000)
Revenue 720,925 691,645 696,056 707,525 734,938
Net Asset Value 560,244 507,140 478,477 439,872 408,730
Cash and cash equivalents 180,971 180,496 124,849 93,898 98,332
Loans and Borrowings 14,972 49,655 51,160 63,422 61,187
Free Cash Flow 46,931 74,181 57,113 10,453 (13,026)

The Hour Glass is currently trading at S$0.82 which is 3.8% above premium to the Net Asset Value of S$0.79 per share.

Financial Ratios FY2019 FY2018 FY2017 FY2016 FY2015
Gross margin (%) 27.0 24.2 22.7 23.7 22.6
Inventory turnover ratio 1.8 1.9 1.8 1.7 1.9
Debt/Equity Ratio (%) 2.7 9.8 10.7 14.4 15.0
Earnings per share (cents) 9.99 7.07 6.91 7.42 8.22
Net asset value per ordinary share ($) 0.79 0.72 0.68 0.62 0.58

I like the following quote from Henry Tay in the FY19 Annual Report.

“Trying to understand is like straining through muddy water. Have the patient to wait. Be still and allow the mud to settle. – Lao Tzu”

What Henry Tay meant was the with the rise of e-Commerce, The Hour Glass  thought they will be threatened by it. However, as time goes by, they realise e-Commerce only cater to the general crowd. What The Hour Glass stands out is that they cater to premium customers.

The Hour Glass Benefits From Revived Demand From Chinese Shoppers

The Hour Glass has been suffering from the downtrend in the luxury goods market in both Hong Kong and China due to the clamp down of corruption from the Chinese government since 2015. This can be seen from the share price where it fell from its highest peak of S$0.88 to around S$0.71. And yes, I was vested prior to the plunge in share price.

The Hour Glass currently makes up 3% of my entire stock portfolio. Re-capping my reasons to stay invested:

  • Simple luxury watch business
  • Good management
  • Consistent dividend
  • Consistent profitability and performance (Revenue, Profits and NAV)
  • Low debt servicing ratio

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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.