Brokers' take: DBS initiates The Hour Glass with 'buy' on Asia's growing wealth

DBS Group Research commenced coverage of luxury watch retailer The Hour Glass AGS : AGS 0%with a "buy" rating and a target price of S$2.62 over the next 12 months.

This offers shareholders a potential upside of 31 per cent from the counter's closing price of S$2.00 on Monday (Mar 14).

In a report released on Tuesday, analyst Paul Yong said that he expects the company to post record earnings for FY2022, riding on its strong financial performance for the first half of the financial year.

The company reported a 63 per cent increase in revenue and a 110 per cent increase in net profit for the first 6 months of FY2022 ended Sep 30, 2021.

Yong said that consumer sentiment was driven by a bullish stock market last year, as well as a shift in domestic spending from travel towards luxury goods. He also expects this trend to continue in the second half of the financial year.

Globally, personal luxury goods have seen a sharp recovery in 2021. According to management consulting firm Bain & Company, global personal luxury goods sales recovered to 283 billion euros (S$425.3 billion) last year - an increase of 29 per cent from 2020 and 1 per cent from 2019.

GET BT IN YOUR INBOX DAILY

Start and end each day with the latest news stories and analyses delivered straight to your inbox.

Sign UpVIEW ALL

However, Yong expects the sales growth of The Hour Glass to moderate in FY2023. This is because of a potentially volatile stock market this year amid an uncertain macroeconomic environment, contributed by impending interest rate hikes and the ongoing war between Russia and Ukraine.

Nevertheless, some of these headwinds could be offset if consumers bring forward their spending ahead of the hike in Singapore's goods and services tax, with the first increase to 8 per cent from the current 7 per cent set to take effect from Jan 1, 2023.

Beyond the immediate term, a long-term structural driver of demand for luxury goods is Asia's growing wealth, noted DBS. The report cited statistics from market data firm Statista on how the luxury watch and jewellery market in the region is expected to grow at a 4-year compound annual growth rate (CAGR) of 6 per cent until 2025. This is higher than the global growth rate of 4.9 per cent.

Also boding well for the demand of luxury goods in the region, Yong noted that the number of high-net-worth individuals in Asia is forecast to grow at a 4-year CAGR of 6.4 per cent, citing estimates by Statista and Credit Suisse.

As of 2020, Asia-Pacific already accounts for the highest number of ultra high-net-worth individuals. Those in Asia-Pacific make up 38 per cent of the world's super-rich, higher than the 35 per cent in the Americas and 27 per cent in Europe, the Middle East and Africa, according to UBS' Billionaires Insights Report 2020.

"Whilst we anticipate a moderation in sales in 2022, i.e., FY2023, we believe the longer-term industry uptrend remains intact on the back of Asia's growing wealth," said the research house.

Another long-term factor supporting The Hour Glass's sales growth is the resumption of travel. Yong noted that the retailer had benefited from the influx of mainland Chinese tourists travelling to countries it operates in. Purchases from this group of customers contribute to about 20 per cent of its direct sales.

However, due to China's strict border restrictions as a result of the Covid-19 pandemic, Yong said that this catalyst would likely only play out over the longer term.

Beyond the uncertain macroeconomic environment that could see The Hour Glass sales growth slowdown in FY2023, other key risks identified by Yong included its dependency on distributorship arrangements and the cooperation of brand owners, challenges in finding suitable locations for new retail outlets on commercially acceptable terms, as well as competition in meeting changes in market trends and customer preferences.

READ MORE:

• Brokers' take: KGI initiates 'outperform' on The Hour Glass as demand for luxury grows 

• Keppel, ComfortDelGro, The Hour Glass latest to redesignate IDs as non-independent directors

• The Hour Glass leads July buyback consideration tally

• The Hour Glass full-year net profit rises 8% to S$82.5m