Lower top line expected for Cortina, Hour Glass, but strong balance sheets will help

Singapore

LUXURY watch retailers Cortina Holdings and The Hour Glass Group are likely to show a drop in revenues when they next report their financials. But their latest numbers suggest both are resilient, with strong balance sheets and light demands on their cash holdings.

Both local and international figures pointed to a possibly tough April-June quarter for the two retailers listed on the Singapore Exchange.

Retail sales for watches and jewellery, which are grouped as a category by the Department of Statistics Singapore, plunged 96.9 per cent year-on year in May and 73.2 per cent month-on-month on a seasonally adjusted basis.

The May numbers were to be expected given that Singapore implemented "circuit breaker" measures in April to stem the spread of Covid-19. These measures were extended through the month of May, when Singapore recorded just 880 tourist arrivals.

Maybank Kim Eng economist Lee Ju Ye said, after the weak local retail sales figures were released: "Sales in department stores and luxury goods . . . will likely stay weak in the near term, as borders stay closed to tourists and consumers stay cautious in a recessionary environment."

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Statistics from the Federation of the Swiss Watch Industry, meanwhile, showed that exports to Singapore plunged by 74.8 per cent year-on-year to 28.4 million Swiss francs (S$42.1 million) in May. Singapore was among the countries that reported a decline of more than the average slide of 67.9 per cent.

Cortina and The Hour Glass acknowledged in their recent financial statements that the luxury sector will not be spared the impact from the pandemic. Both companies rely to some extent on tourist arrivals, which have dried up following the restrictions on international travel. At the same time, consumer sentiments have turned cautious.

In their most recent results announcements, the companies said they cannot determine with certainty how their businesses would be affected by the pandemic as the situation is evolving.

Yet both also have strong balance sheets to weather the pandemic. Cortina's cash balance as at the end of March stood at S$114 million while The Hour Glass's was S$183 million.

Both also had quick ratios over one. A quick ratio above one indicates that a business has enough cash or cash equivalents to cover its short-term financial obligations and sustain its operations. In fact, both companies are in net cash positions.

Furthermore, their interest coverage ratios were 25.2 times and 28.4 times, respectively, for Cortina and The Hour Glass.

The probability of them filing for bankruptcy within the next two years, as indicated by the Altman Z-score, is also low. Cortina had a score of 4.76 while The Hour Glass' was 3.63. The higher the value, the lower the probability of bankruptcy. A score below 1.8 indicates bankruptcy is imminent while a score above three indicates bankruptcy is unlikely.

Cortina and The Hour Glass recently reported decent earnings for the financial year 2020, bolstered by stronger income in the first half.

The Hour Glass clocked its best results to date, thanks to a 26 per cent year-on-year increase in income in the first half. But its net profit declined 3 per cent in the second half.

Cortina's earnings were 59 per cent higher year-on-year for the first half, but increased by a smaller 19 per cent in the second half.

Cortina shares are down 12.1 per cent since the beginning of the year, and are currently trading at book value. The Hour Glass is down 15 per cent, and is currently trading at a 21 per cent discount to its book value.

Cortina shares closed three Singapore cents lower at S$1.35 on Thursday, while The Hour Glass was up one Singapore cent to S$0.685.