Grab a Chair While The Queue Is Short
- 2Q15 results were in line with expectations, and we think the worst of negative earnings surprises is behind us.
- While sales remain weak, we believe this is largely a function of poor market conditions.
- The company’s fundamentals remain intact in the longer term, in our view.
- With value emerging, we upgrade the stock to BUY with a new TP of SGD1.78 (22% upside), and recommend positioning for a recovery.
Sales still weak, but profit sequentially better.
- 2Q15 revenue continued to be weak, down 13% YoY.
- Sales in most of its markets declined YTD (with the exception of Hong Kong), in line with general consumer discretionary spending.
- Profit attributable, however, showed a sequential improvement to SGD22.5m, on better margins.
TWG expansion in China delayed.
- TWG’s expansion in China this year is likely to be slower than previously expected, mainly due to licensing issues for its central kitchen. Expansion in Beijing is likely to be delayed until end-2015.
- We believe these start-up costs are still eating into the bottomline of TWG, which is otherwise a good and profitable business model.
- Meanwhile, Hong Kong is likely to see the opening of 3-4 new stores this year.
Expect 2H improvement, strong balance sheet intact.
- While we are cognisant of the poor spending environment in its core markets, we believe 2H15 may see improvements, with the recent launch of uMagic in its biggest market in China in June as well as a possible new marketing campaign.
- The company is sitting on a net cash position of SGD255m (SGD0.34/share), and continues to generate healthy cash flow.
Value emerging.
- Based on the current price, the stock is trading at an ex-cash P/E of 10.8x FY15F and a dividend yield of 4%.
- Collaborations between OSIM and Trek 2000 International (TREK SP, UNDER REVIEW) may lead to the introduction of interesting new products going forward.
- We reduce our earnings estimates by 4-7%, but upgrade our call to BUY (from Neutral), pegging our TP to SGD1.78 (from SGD2.00), based on 15x FY16F P/E.
- OSIM’s lawsuit vs TWG’s minority shareholders will be heard next month, and an unsatisfactory outcome represents a key risk to the stock.
(James Koh)
Source: http://www.rhbgroup.com/
