DBS Group Research 2015-07-24: OSIM International - Wait for more sustained recovery. Maintain HOLD.

Wait for more sustained recovery 

  • 2Q15 earnings below expectations, earnings continued to decline y-o-y albeit at a slower pace. 
  • Cut FY15/FY16F earnings by 15% each. 
  • Strong balance sheet; share price supported by 4% dividend yield. 
  • Maintain HOLD with lower TP of S$1.61. 

2Q15 below expectations. 

  • OSIM turned in slightly weaker than expected results; earnings of S$22.4m (-24% y-o-y) was below our estimates. 
  • The drag came from lower than expected topline, offset by lower staff costs. 
  • Revenue declined 13% y-o-y to S$159.5m but improved 6% on a q-o-q basis, contributed by sales of newly launched uMagic chair. 
  • OSIM has now registered four consecutive quarters of y-o-y earnings decline, albeit at a slower pace (-24% vs - 53% y-o-y last quarter). 
  • We have also observed declining inventory turnover or longer inventory days over past three consecutive quarters. 
  • A dividend of 2 Scts for the quarter was declared, in line with our expectations. 

Growth supported by new products, more stores. 

  • OSIM’s revenue has been falling; the declines of 13% in 1Q and 2Q15 have been the deepest in around six years. 
  • We believe core chair sales have been weak due to subdued demand. 
  • Nonetheless, our growth outlook is likely to be supported by the new uDiva Classic sofa chairs, and new OSIM and TWG stores. 
  • Five new TWG stores are poised to open in Hong Kong and Macau in 2H15. 

Cut FY15F/FY16F earnings by 15% each. 

  • Factoring in the earnings disappointment, we cut FY15F/FY16F earnings by 15% each. 
  • We lower our store count and sales per store assumptions as both parameters have lagged our expectations. 
  • We also impute higher opex as we believe marketing expenses will increase due to uMagic’s change of marketing strategy. 

Maintain HOLD, TP lowered to S$1.61. 

  • We maintain our HOLD rating as we look for OSIM to turn in better earnings growth visibility. 
  • At current price, the stock offers a 4% yield, on DPS of 6 Scts. 
  • There is low risk of any cut to DPS as net cash is strong. 
  • We hence see limited downside for the stock, but also believe upside is capped. 
  • We roll over our 14x PE based valuation to FY16F EPS, which translates to a TP of S$1.61. 
  • Maintain HOLD. 

Source: http://www.dbsvickers.com/