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

KGI Securities has initiated coverage on The Hour Glass with an "outperform" recommendation and a target price of S$2.32.

The target price implies a potential upside of about 14.9 per cent from the speciality luxury watch retailer's trading price of S$2.02 as at 1.15 pm on Thursday (Feb 17). The Hour Glass's shares were up S$0.01 or 0.5 per cent at the time.

The S$2.32 target price also takes into account a weighted average cost of capital rate of 10.5 per cent and a terminal growth rate of 2 per cent, said KGI in a research note on Thursday.

KGI analyst Megan Choo noted that The Hour Glass's retail trade business has been largely resilient in the face of inflation - which has been "running the hottest" in almost 40 years.

"Rising costs are easily passed down to consumers as demand for luxury items continues to remain strong," Choo said.

The research team expects the shift from spending on experiences to goods is likely to stick around for another year as travel and social gatherings are still limited in many parts of the world.

Management consulting firm Bain & Co expects luxury goods spending to hit record levels in 2022, while price hikes for luxury goods will continue to occur - with some hitting double-digit increases. Particularly, China's reopening will likely fuel the overseas luxury goods sector due to pent-up demand, said KGI.

The Hour Glass carries various top luxury watch brands such as Rolex, Patek Philippe, Audemars Piguet, Hublot and Omega.

The company is also seen as more attractive when compared to Cortina - its only other Singapore-listed peer. Cortina is trading at a 12-month price-to-earnings (PE) ratio of 13.3 times, which is a premium of about 14.7 per cent to The Hour Glass's 12-month PE ratio of 11.6 times.

The Hour Glass is also trading at a more attractive historical price-to-book (PB) ratio of 2 times, which is a 20 per cent discount to Cortina's PB ratio of 2.5 times, KGI added.