OSIM International Ltd - Phillip Securities 2015-10-29: In the Hot Seat

OSIM INTERNATIONAL LTD O23.SI

OSIM International Ltd - In the Hot Seat

3Q15 performance was well below estimates due to macro headwinds and higher costs.
Cloudy outlook to persist in the region; eyes on TWG Tea.
Declared DPS of 1 cent.
Downgrade to “Neutral” rating with lower TP of S$1.44.

Re-launch of uMagic with artist ambassadors failed to lift weak market sentiment.
3Q15 sales were down 11% y-y due to soft demand across the broad. The management attributed the dull demand to the hazy weather and currency turmoil in the region.
Startup and operational costs, legal fees weigh on profitability. Nonetheless, the company’s balance sheet remains healthy, with a net cash and fixed income investments of SGD232 mn. The management has also proposed an interim dividend of 1 cent per share.
Focus on TWG Tea business; HK may be the lone bright spot amidst regional slowdown. Having opened two stores in Hong Kong, the company aims to add another three stores by end-2015. The management expects the TWG Tea business in HK to pick up in near term. Meanwhile, it will also continue to attract more franchisees and hoteliers.

Continue to grow TWG Tea business, alongside store rationalization in OSIM and GNC/RichLife segments
Legal burden to moderate in 4Q15. 3Q15 legal fees spiked to SGD4 mn from SGD3 mn in 1H15

The company’s strategy to offer different price points may be muted and we expects weak earnings momentum into 2016, which imply longer breakeven period for new stores and may even put future dividend at risk. We reduced our earlier projected number of new stores and slashed earnings FY15-16F against challenging backdrop. We also adjusted the number of stores to reflect the progress of the ongoing store consolidation.

We downgraded to “Neutral” rating with lower TP of S$1.44 (Previous: S$1.83).
With the U.S. Fed’s imminent rate hike, we expect the currency market to remain volatile throughout 2016, projecting a less optimistic outlook for retail sales in South Asia. However, the strong financial position should help the company to weather through the storm.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2015-10-29

Phillip Securities SGX Stock Analyst Report NEUTRAL Downgrade BUY 1.44 Down 1.83