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UOB Kay Hian Research 2015-07-24: OSIM International - 1H15 Another Weak Set Of Results. Maintain HOLD.

1H15: Another Weak Set Of Results 


  • Unsurprisingly, OSIM reported another weak set of results. 
  • The group’s 1H15 net profit contracted 38% yoy due to weak sales and escalating operating costs. 
  • Overall, 2015 will be an uninspiring year for OSIM on the back of an unexciting retail and consumer environment. 
  • We do not see any reprieve in the near term but note that its stock price has declined 25% ytd and markets are likely to have already priced in the weak outlook. 
  • Maintain HOLD with a lower target price of S$1.56. (Previously: S$2.02.). Entry price: S$1.35. 


RESULTS 


• Net profit was below our expectations, representing 40% of our full year estimates. 

  • Sales and net profit continued to contract with 1H15’s revenue falling 13% yoy to S$309m and net profit declining 38% yoy to S$36m on the back of weakness in the retail environment across its major markets, North Asia and South Asia. 
  • As at 1H15, OSIM had 560 stores and China stood as its top market with 251 outlets in 45 cities. 

• Poor sales growth and escalating operating costs led to eroded margins. 

  • Operating EBITDA for 1H15 dropped 33% yoy to S$57m as OSIM grappled with higher start-up costs and staff costs from the TWG business on top of poor sales growth. 
  • Net margin fell 4.6ppt to 11.7% in 2H15. 

• Dividend of 2 S cents/share. 

  • Management guided that its 2015 dividend payout will likely remain at 6 S cents/share, flat yoy. This implies a 3.2% dividend yield. 


STOCK IMPACT 


• Losing its magic. 

  • As expected, OSIM’s core business experienced weaker sales due to an uninspiring retail environment despite having rolled out the high-end uMagic in 2Q15. 
  • uMagic, featuring the patented hand-grip massage technology, is the replacement for uDivine. 
  • Management guided that the sales of OSIM chairs have been more stable compared with the group’s smaller-sized products. 
  • We expect the weakness in sales to extend into 2H15. 

• TWG still not profitable. 

  • Profitability is yet to be seen for the TWG business as the group ended 1H15 with 47 TWG outlets and expects to open a total of 15 new outlets in 2015. 
  • Though the Singapore outlets have been profitable, we expect TWG shops in China to continue its drag on the business as a whole. 
  • Management shared that to build central kitchens in China, a minimum of three TWG shops in each associated city is required and it is likely to take time to ramp up these numbers. 
  • Operating expenses will remain elevated as OSIM is likely to open more stores in Shanghai, Beijing and Guangzhou. 
  • In addition, we expect a quarterly drag of S$1m-2m in legal expenses from both the Hong Kong litigation and the shareholder dispute in Singapore. 

• Finally deploying some of its cash hoard. 

  • OSIM invested S$10.9m for a 8.4% stake in Trek 2000, a SGX-Listed technology company as well as US$2m for a 21% stake in a Hong Kong incorporated company, cosmetic company Laboratoires du Palais Royal Limited (LDPRL). 
  • While there are no publicly available financials for LDPRL, Trek 2000 had generated a net profit of US$2.5m in 2014 for equity holders. 
  • OSIM hopes to collaborate with Trek 2000 and develop products particularly in the areas of medical diagnostics technology. 
  • As at end-1H15, OSIM’s balance sheet remained strong with a net cash position of S$255m. 


EARNINGS REVISION/RISK 


  • We cut our 2015 and 2016 net profit forecasts by 3.9% and 8.2% respectively on the back of lower revenue per store and escalating operating costs from amortisation and staff costs. 


VALUATION/RECOMMENDATION 


  • Maintain HOLD but with lower DCF based target price of S$1.56 (previously: S$2.02) to account for the lower earnings in 2015-16. 
  • Despite the possibility of downward pressure on its share price due to earnings contraction on the back of a lacklustre retail environment, we note that there could be some share price support as OSIM is currently trading below its 3-year P/E mean of 15.9x and that markets are likely to have priced in the tepid outlook for the near term. 
  • Entry price: S$1.35. 
  • Company share buybacks continued in the quarter and CEO Ron Sim increased his stake as well The company had conducted a series of share buybacks after the 1Q15 results, snapping up 11.3m shares at a weighted average cost of S$1.687 while CEO Sim increased his stake to 65.57% from 64.85% at a weighted average cost of S$1.60/share. 


(Brandon Ng, CFA; Bennett Lee, CAIA)

Source: http://research.uobkayhian.com/



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