Is The Hour Glass Limited (SGX:AGS) Overvalued? A Deep Dive into Fundamentals and Market Sentiment

The Hour Glass Limited (SGX:AGS), a Singapore-based luxury watch and jewelry retailer, has long captivated investors with its blend of operational efficiency and brand prestige. Yet, as of March 2025, the stock trades at a P/E ratio of 9.3x and a P/B ratio of 1.36, raising questions about whether its valuation aligns with its fundamentals. This article evaluates whether the stock is overvalued despite its 14% return on equity (ROE) and modest earnings growth, and whether market expectations are justified.

Fundamentals: A Mixed Bag

The Hour Glass's ROE of 14% is a solid figure, matching the industry average for luxury retailers. This metric suggests the company is effectively deploying shareholder capital, a critical factor in assessing long-term value creation. However, its five-year earnings growth rate of 13% lags behind the industry's 19%, signaling potential operational or strategic challenges. The decline in earnings per share (EPS) from S$0.24 in FY2024 to S$0.21 in FY2025 further underscores this trend, with first-half 2025 EPS dropping to S$0.095 from S$0.12 in the prior year.

The company's profitability remains robust, with a net profit margin of 11.65%, but its dividend track record is less impressive. The final dividend was cut from S$0.06 to S$0.04 per share in FY2025, reflecting a shift toward reinvesting earnings for growth rather than rewarding shareholders. This strategy, while common in capital-intensive industries, may deter income-focused investors.

Valuation: Undervalued or Mispriced?

The stock's P/E ratio of 9.3x is significantly below the Luxury Goods subindustry average of 16.2x, suggesting it is undervalued relative to peers. A deeper look at the P/B ratio of 1.36—trading at a slight premium to book value—reveals a more nuanced picture. While the company's book value per share has grown at a 10.5% annualized rate over five years, the market appears to price in skepticism about future earnings potential.

Discounted Cash Flow (DCF) models estimate the stock's intrinsic value at S$7.56, while the Dividend Discount Model (DDM) yields S$2.79. At a current price of S$1.95, the stock trades at a 42.7% discount to DCF estimates, implying the market is underestimating its long-term cash flow potential. However, the DDM's lower valuation highlights the company's reinvestment strategy, which prioritizes growth over immediate shareholder returns.

Market Expectations vs. Reality

The disconnect between fundamentals and valuation metrics points to divergent market expectations. While The Hour Glass's ROE and profitability are commendable, its earnings growth has failed to outpace the industry. This raises the question: Is the market pricing in a conservative outlook for the company's ability to sustain its ROE in a competitive luxury retail landscape?

The company's strategic moves—such as acquiring the Australian Rolex license and expanding in Southeast Asia—suggest a focus on long-term value creation. However, these initiatives may take time to translate into earnings growth. The recent EPS decline and dividend cuts have likely tempered investor enthusiasm, contributing to the stock's undervaluation.

Investment Implications

For long-term investors, The Hour Glass presents a compelling case. Its strong ROE, expanding book value, and strategic positioning in high-growth markets like Southeast Asia and Australia suggest a foundation for future appreciation. The current valuation, trading below DCF estimates, offers a margin of safety for those willing to wait for earnings growth to catch up with fundamentals.

However, short-term risks persist. The luxury sector is cyclical, and economic downturns could dampen discretionary spending. Additionally, the company's dividend cuts may deter income-focused investors. A bear market scenario could push the stock to S$1.11–S$1.13 by FY2028, though a conservative positive outlook targets S$2.60–S$2.83 by 2026.

Conclusion

The Hour Glass Limited is not overvalued; rather, it appears undervalued relative to its intrinsic worth and industry peers. While its ROE is solid, the modest earnings growth and dividend cuts have created a valuation gap. Investors who believe in the company's long-term strategy—leveraging its brand partnerships and expanding into high-growth markets—may find this an attractive entry point. However, patience and a tolerance for short-term volatility are essential. For those seeking immediate income or rapid earnings growth, the stock may require a more cautious approach.