OSIM International - DBS Research 2015-10-28: Weak Outlook

OSIM INTERNATIONAL LTD O23.SI

OSIM International - Weak outlook

Headline net profit of S$6.2m (-62% y-o-y) was significantly below our forecasts.
3Q15 revenue declined by -10% y-o-y to S$142m as a result of slower sales from North and South Asia on the back of weak consumer sentiment, store closures and lower sales per store.
Operating margins dropped 7.8ppts to 9.2% due to higher opex such as rents, labour and marketing expenses.
Earnings included S$4m of legal costs. Excluding the one-off legal costs, earnings would still have been disappointing at S$10.2m.
OSIM declared DPS of 1 Scts per share, in line with our expectations.

We believe that end demand for OSIM products are weak. Store count is being rationalised and quarterly sales per store have declined. In addition, inventory days have increased. With the inventory build-up and slower sales traction, we do not expect aggressive store expansion and sales per store to be strong going forward.

We have cut our FY15-17F earnings by 24%-29%. We reduced our store expansion and sales per store assumptions and imputed a relatively higher cost structure to account for the longer period for new TWG stores to breakeven in light of weak consumer sentiment and slower regional GDP growth environment.

Our S$1.22 TP is based on 14x FY16F earrings, which is pegged to the stock’s average 3-year historical mean valuation.
Further earnings disappointment would put DPS for 4Q15 and future quarters at risk.
Downgrade to FULLY VALUED.

Alfie Yeo DBS Vickers | Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2015-10-28

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