The Hour Glass

Just sharing my reading of the FY2022 full year results. Not an analysis of THG business which is already insightfully and comprehensively discussed / contributed in this wonderfully amazing investment thread on The Hour Glass.

FY2022 Financial Performance (read in conjunction with attached picture 1)
THG delivered a remarkable performance for the full year ended 31Mar2022.
Revenue increased 39% yoy, driving operating profit growth (78%) and PATMI growth (88%).
Aside from strong revenue growth, GPM reached an incredibly high 32.7%, boosting OPM to 19.1%.
Revenue crossed SGD1B and PATMI reached SGD155M.
PATMI would have been higher at SGD163M if not for impairment losses due to revaluation.

Final dividend of 6cts/share (FY2021: 4cts/share) is an indication of business confidence and a pleasant surprise given that:
(i)  there was an interim dividend of 2cts/share; and
(ii) THG spent SGD34M on share buybacks in FY2022.
In total, THG returned SGD89M to shareholders in the form of dividends (SGD55M) and share buybacks (SGD34M) -- about 57% of PATMI.

Growth had however slowed in 2H2022. Revenue growth in 2H2022 at 24% is much lower than the 63% increase in 1H2022.

Outlook
Looking ahead, revenue growth in FY2023 is likely to slow to between 10% and 30%.
One risk would be whether the high GPM and OPM can be maintained.

Valuation [u](read in conjunction with attached picture 2)[/u]
I believe that chances are medium-to-high that the PATMI level of SGD163M can be maintained (if not improved) over the next 10 years.

Assigning 15X PE and taking into consideration net cash position of SGD212M, I arrive at a fair value of SGD4.00/share.

Why 15X PE is fair? I do not have a scientific explanation. Just that my general feel is that 15X PE is not demanding for a high-quality company listed on SGX. Also note that a very similar peer, Watches of Switzerland (with a less profitable business model), is trading on LSE at about 30X PE.

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Valuing THG by pegging it to a historical PER of 15x using the latest FY22's EPS of $0.2234 would give $3.35. Against the last done at $2.37, that means there is still a price gap of 41%. Is this valuation realistic? To be more accurate, we should adjust the reported FY22's net profit of $154.7m by adding back the $6.6m of accounting impairment loss. Since the number of outstanding issued shares has been falling steadily because of the persistent share buybacks, we should consider using the latest (as at 27May22) number which is a reduced 676.95m shares. Using the adjusted net profit of $161.3m and the latest outstanding issued shares of 676.95m, we would get a higher adjusted EPS of $0.238. Pegging this to a PER of 15x, we would get a higher valuation of $3.57. If we assume FY23's earnings going up by just 5%, we will get a prospective EPS of $0.25. Using the same valuation of $3.57, this would also mean we are pegging it at a prospective PER of 14.3x. Still realistic?

The above number crunching are for those who believe more in numbers. Does Dr Henry Tay think and value the business along the same number logic? Probably not entirely. Since the Tay Family now holds a 70% interest, the best valuation may be just what Dr Henry Tay is willing to sell the family's stake for. Since the business and earnings are now so attractive, any deal on the Tay Family's 70% interest will likely be with a very reputable buyer and at a princely sum.

(29-05-2022, 02:03 PM)dydx Wrote: Since the business and earnings are now so attractive, any deal on the Tay Family's 70% interest will likely be with a very reputable buyer and at a princely sum.

I do not think there is a remote chance that Dr Henry Tay will be selling out.

There is a reason why they outbid everyone for the building that house LV on Collins Street, proceeded with a 10million impairment on the FV on the books, and then called it a "once-in-a-generation opportunity that will become one of our bedrock assets across generations".

The Tays and Chans are about about family. It fits the theme of how all the luxury houses work, it is all within the family across generations and the longstanding relationships that were established across the scions and "scion of scions" of their families (and then the scion of the "scion of scions"..)

I am re-hashing d.o.g's very instrumentative post 1 year ago as below:
https://www.valuebuddies.com/thread-258-...#pid162307

I have been pretty lucky to get into THG during Covid-19. Lucky because while I was sure it would run back to NAV eventually, but never in my imagination would I thought I would see >2x NAV. I am under no illusion that much of these "paper gains" can just evaporate when the tide turns.

So what is the end game? When I re-read back the last 10 years THG thread in VB.com, I realize it is probably futile to be talking about the end game - too much mental resources has been used speculating about very very low probability stuff. So it might be better to roll the dice, trust the jockey and most importantly, adopt their mentality - for the family, about the family and across generations. Anyways, isn't it what those Swiss mechanical watches are about?

The end game for minority shareholders may just come early should the Tay Family decides to privatise/delist THG. On the other hand, the achievable market value for THG as a business and as a stock should be guided by how much the Tay Family is prepared to sell their 70% controlling interest for to the right buyer.

https://links.sgx.com/1.0.0/corporate-an...2f5f4deebe

Another 1.64m shares - 53.6% of total shares transacted today - bought back by the company today, paying an average close to $2.40/share. It looks like the Tay Family is going to cross 70% soon.

https://links.sgx.com/FileOpen/Proposed%...eID=719573

The Hour Glass Limited (the “Company”, and together with its subsidiaries, collectively
the “Group”) wishes to announce that The Hour Glass (Australia) Pty Ltd (“THGA”), a
wholly-owned subsidiary of the Company, has entered into a sale and purchase
agreement (the “SPA”) with Dexus Wholesale Management Limited (as vendor) for the
acquisition of the freehold property located at 151-155, 159, 161 and 171 Edward
Street and 211 and 211A Elizabeth Street, Brisbane, in Australia (the “Property”).

The consideration for the purchase of the Property is A$82.2 million (approximately
S$81.4 million) (the “Purchase Consideration”). The Purchase Consideration was
arrived at on a “willing buyer-willing seller” basis, based on THGA’s assessment of the
Property’s value having regard to its prime location.

RATIONALE
The acquisition of the Property is in line with the Group’s strategy of owning properties
at prime locations in selected cities.

It did take me a long time to understand the luxury products sector as someone who is not used to visiting high end boutiques to buy lux items, although I do admit simply being inside sparks joy.   There is simply too little stocks relative to the no. of rich people/willing buyers in the whole world.

I do appreciate the Rolex oyster perpetual but my first thought would be to visit pre-owned shops to buy a used one(but with the Rolex card). The bonus would be if the children also like the model then can pass to them in the future haha. While wearing one, rarely anyone would ask whether you bought it first hand or not.

I think, buying a brand new piece from the boutique, is more for the experience and the pleasant memory.

So now there is this Subdial50 index which tracks global market prices for the 50 most traded luxury watches by value. (first article below)

---------------------------

Rolex and Patek returns beat vintage cars and Bitcoin
https://www.businesstimes.com.sg/consume...nd-bitcoin

Why you can’t buy a Rolex – and it’s not because of the price
https://www.msn.com/en-gb/money/other/wh...ar-AAYFQem

Story of a Hermes Birkin: how I got mine, and tips for bagging one
https://happyhighlife.com/hermes-how-to-get-a-birkin/

The luxury watch market is durable but no surprises that there is strong correlation with prosperity, hype and greed.

Crypto Meltdown Claims Rolex and Patek Philippe as Victims

The crypto meltdown has claimed its first luxury victim: the Rolex Daytona.

After reaching record highs earlier this year, prices for the most desirable watches on the secondary market, including the coveted Rolex, have now fallen.

https://www.bloomberg.com/opinion/articl...et-watches

Googled and found the Subdial50 index here: https://beta.subdial.co/market

In last FY22 (ended 31Mar22), THG's watch distribution/retail business covering SG in the main and other selected Asian markets realised a high average blended GP Margin of 32.7%. This is because of strong demand by consumers/collectors and skilled execution by THG management, including buying direct from the owners/manufacturers of the leading, popular watch brands - many (e.g. Hublot) under exclusive distributorship arrangements - at likely best possible wholesale prices.

Due to shortages arising from high demand far exceeding supply, and partly driven by speculators, secondary market prices especially for certain very popular watches (e.g. the Rolex Daytona) had sky-rocketed. By rational thinking, such rapid escalation of secondary market prices is not sustainable. The correction that followed would hurt those speculators who chased up prices, and dampen the sprit of others, but it should not hurt THG's business which enjoys a growing customer base and is mostly transacted at the lower official selling prices managed together with the brand owners. It is also reasonable to believe that the brand owners would provide support - in marketing, inventory, financing and price - if and when world economic and watch market conditions turn for the worst.

(05-07-2022, 07:25 AM)dydx Wrote: In last FY22 (ended 31Mar22), THG's watch distribution/retail business covering SG in the main and other selected Asian markets realised a high average blended GP Margin of 32.7%. This is because of strong demand by consumers/collectors and skilled execution by THG management, including buying direct from the owners/manufacturers of the leading, popular watch brands - many (e.g. Hublot) under exclusive distributorship arrangements - at likely best possible wholesale prices.

Due to shortages arising from high demand far exceeding supply, and partly driven by speculators, secondary market prices especially for certain very popular watches (e.g. the Rolex Daytona) had sky-rocketed. By rational thinking, such rapid escalation of secondary market prices is not sustainable. The correction that followed would hurt those speculators who chased up prices, and dampen the sprit of others, but it should not hurt THG's business which enjoys a growing customer base and is mostly transacted at the lower official selling prices managed together with the brand owners. It is also reasonable to believe that the brand owners would provide support - in marketing, inventory, financing and price - if and when world economic and watch market conditions turn for the worst.

Whilst things like property is still booming in SG , very likely its the peak in luxury and wealthy spending sector and hence peak earnings.

My take is that now is good time to sell out of THG if you were in during covid times and done a good profit. 

Global recession is almost a given at this stage, will be confirmed end july i guess, but more or less confirmed if you look at Atlanta fed GDPNow forecast. And usually in recession times luxury and other spending consumer sectors like cars/travel/hotels/etc.. will be hit hard. 

Also a lot of luxury watch buyers and speculators are the same crypto/tech stocks crowd that is now bleeding badly. There will likely be a glut of watches pretty soon as the secondary market falls.

I believe could very well hit back to 50c+ lows again for THG this recession. Would be good to load up again then.