Cortina Holdings Limited (SGX: C41) is a leading retailer and distributor of luxury timepieces and accessories across the Asia Pacific region. The group has 24 boutiques located in countries such as Singapore, Malaysia, Thailand, Indonesia, Hong Kong, and Taiwan.
Cortina caters to a high-end clientele who have the ability and means to spend a significant sum of money on discretionary items. With a tougher retail climate and an impending economic slowdown globally, many consumers are cutting back on their spending. This is expected to affect retail sales for many categories of products, particularly for luxury goods such as jewellery, timepieces and branded goods. Only necessities and essential goods such as food and household items usually remain immune to such slowdowns.
However, Cortina has shown surprising resilience in the face of such challenges. In its FY 2019 earnings (fiscal year ended 31 March 2019), although the group reported a 1% year-on-year fall in revenue, net profit after tax jumped 31% year-on-year o S$29.2 million. In its most recent quarter (Q1 2020 ended 30 June 2019), revenue increased by 20% year-on-year, while net profit surged 69% year-on-year. Investors may wonder – what’s driving this and can it continue?
Resilient demand from the rich
Though the rich are also affected by economic downturns, demand from high net worth individuals is generally resilient as they have many sources of income. This makes them less affected compared to the ordinary man on the street. Their propensity for purchasing luxury goods is also not dampened by economic cycles, and businesses such as Cortina and high-end luxury handbag brands (such as Hermes) are also relatively immune to downturns.
Rising middle-class influence
Asia also sees strong tailwinds in the form of a rising middle-class in countries such as Vietnam, China, and Indonesia. As these countries slowly modernise and grow, a large swath of the population will be lifted out of poverty and enter the middle-class segment. This group is known as the “aspiring rich”, and a portion of them will begin to purchase luxury items, both as a signal of their growing affluence, as well as their higher ability to afford such purchases.
Strong free cash flows
Cortina also generates very strong and consistent free cash flows (FCF), as evidenced by its FCF of S$80 million for FY 2019 and nearly S$50 million for FY 2018. In Q1 2020, the group continued its strong FCF track record with yet another S$9.3 million generated. With such healthy cash flows, the business has fortified itself from a more severe downturn.
A great business to own
The group is one of the long-standing luxury retailers with a strong presence in many Asian countries, allowing it to tap on increased demand from both the rich and the aspiring middle-class. In addition, Cortina has also been increasing its dividends – it paid out a total of 4.5 Singapore cents in FY 2018 but increased this to 5.5 Singapore cents in FY 2019, and at the last traded price of S$1.31, the trailing dividend yield was 4.2%.
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The information provided is for general information purposes only and is not intended to be personalized investment or financial advice. Motley Fool Singapore contributor Royston Yang does not own shares in any of the companies mentioned.
Motley Fool Singapore 2019