Brokers’ take: DBS downgrades The Hour Glass to ‘hold’ on moderating revenue outlook

DBS Group Research downgraded its call on The Hour Glass to “hold” from “buy”, as it expects revenue of the luxury watch retailer to moderate in FY2023 amid macroeconomic uncertainties.

In a report on Monday (May 30), the research team also cut its target price on the counter to S$2.54 from S$2.62. The target price is pegged to 13.5 times the brokerage’s estimates for FY2022 earnings, which is lowered from its initial valuation of 14.5 times.

Shares of The Hour Glass were trading at S$2.40 at 10.35 am on Monday, up S$0.03 or 1.3 per cent.

The Hour Glass on Thursday posted a net profit of S$92.1 million for its fiscal second half ended Mar 31, or 74.7 per cent higher on year, while revenue for the period also increased 23.8 per cent on year to S$561 million.

The company said the set of results came on the back of an “accelerating momentum” in customer demand for mechanical watches, adding that the interest in watches had been “broadening and deepening” over the past few years.

While the results were in line with expectations, the DBS research team expects revenue will slow down in FY2023, as it had observed that The Hour Glass’s revenue are typically impacted negatively during periods of economic uncertainties.

It expects recession and inflation fears could weigh on consumer confidence and subsequently lead to a slowdown in luxury goods spending.

Spending among locals on luxury goods may also recede as travel-related spending resumes, given that global luxury good brands such as The Hour Glass had benefited from a surge in domestic spending in recent years.

DBS said the incoming Goods and Services Tax (GST) hike as well as the return of tourists as borders reopen could lend some support to sales. It, however, noted that the return of Chinese tourists – which typically make up around 20 per cent of The Hour Glass’s sales – will likely only materialise over the medium to longer term, given China’s strict zero-Covid-19 stance.

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The research team estimates the company will post a gross margin of 29.8 per cent and net margin of 13.6 per cent in FY2023, which is a moderation from record high margins in FY2022.