Only Time Will Tell
Financials
FY22A revenue in line. FY22A revenue reached a record c.S$1bn (up 39% y-o-y), on the back of robust demand, notably from Malaysia and Australia. The group’s FY22A revenue growth was aligned with our expectations.
Positive earnings surprise, which exceeded our estimates by c.30%. FY22A net profit reached S$155m (up 88% y-o-y), which exceeded our initial estimates of c.S$120m by 29%. The positive surprise in FY22A net profit was driven by (i) higher gross margins of 32.7% in FY22A (vs. 29.2% in FY21A) – contributed by robust demand – and (ii) lower operating expenses of 14.3% of revenue (down from 15.1% in FY21A). FY22A net margins were at 15.0%, up from 11.1% in FY21A.
Growth in DPS aligned with estimates. Given the group’s robust financials, FY22A DPS increased to 8 SGD cents, up from 6 SGD cents in FY21A. Going forward, we anticipate the group will maintain its DPS at 8 SGD cents, which translates into a steady FY23F dividend payout ratio of 42% and a steady implied dividend yield of 3.4%.
Strong balance sheet. The group’s balance sheet remained strong with a net cash position, with cash and bank balances at S$323.4m.
Our views
(-) Continued macroeconomic uncertainties a potential drag to revenue. We reiterate our view in our initiation report, where we estimate a moderation in FY23F revenue in lieu of the ongoing macroeconomic uncertainties i.e., Ukraine-Russia conflict, impending interest rate hikes and more. Since 1997, we have observed that during periods of economic uncertainties, Hour Glass’s revenue are typically impacted negatively (see right).
In our view, we believe continued macroeconomic uncertainties, as well as recession/inflation fears could impact consumer confidence and subsequently lead to a slowdown in luxury goods spending in FY23F.
(-) Resumption of travel-related spending. In recent years, global luxury goods brands (including Hour Glass) has benefited from the surge in luxury goods spending within domestic markets, given the spillover spending from travel-related spending, according to Bain & Company. In our view, the resumption of travel-related spending could reduce spending amongst locals on luxury goods.
(+) GST hikes and border reopening could lend some support. Though, potential frontloading of consumer spending ahead of the incoming GST hikes in Singapore (effective 1 Jan 2023/24) and the return of tourists with the reopening of travel borders could lend some support to sales. Though, we note that Chinese tourists make up c. 20% of Hour Glass’ sales; Given China’s current strict zero-COVID19 stance, we anticipate the return of Chinese tourists to only materialise over the medium to longer term.
Macro events impact on Hour Glass’ sales
| YoY Increase (Decrease) % | |||
| Macro Events | FY | Sales | Net Profit |
| Asian Financial Crisis | FY98 | (5) | (93) |
| FY99 | (38) | (1,145) | |
| Dot.com Bubble | FY01 | (6) | 19 |
| FY02 | (2) | (30) | |
| Global Financial Crisis | FY09 | (10) | (58) |
| COVID19 Pandemic | FY21 | (1) | 8 |
| Average | (10) | (216) | |
| Median | (6) | (44) |
Source: Company, DBS Bank;
(-) We anticipate a slowdown in revenue and earnings in FY23F, a moderation from the record breaking year of FY22A. We have assumed a -8% slowdown in revenue in FY23F. Separately, we have adjusted our gross and net margins estimates to 30% and 13.5% (versus our initial estimates of 29% and 12%), which is a moderation from the record high margins that were witnessed in FY22A, albeit higher than our initial estimates. Gross and net margins of c. 30% and c. 13.5% were also aligned with Hour Glass’s average margins over the recent three years.
With these assumptions, our FY23F earnings forecasts are raised by 13%, predominantly driven by the change in our margin estimates. Though, relative to FY22A earnings, our revenue and earnings (pre ex.) estimate were down by 8% and 20% respectively, illustrating our view of a moderation in financials in FY23F.
We downgrade to HOLD with TP of S$2.54. We downgrade to HOLD as we peg our valuation to a forward PE of 13.5x (versus initial 14.5x) in lieu of ongoing macroeconomic uncertainties. We note that a forward PE ratio of 13.5x is aligned with c. 15% discount to Hour Glass’s global peers (see below).