OSIM International - RHB Invest 2015-10-28: Hunker Down For Now

OSIM International - RHB Invest 2015-10-28: Hunker Down For Now OSIM INTERNATIONAL LTD O23.SI 

OSIM International - Hunker Down For Now

  • OSIM’s 3Q15 results were below expectations, with net profit attributable coming in at just SGD6.2m, though it includes the SGD4m amount of legal expenses incurred. 
  • Decline was broad-based, especially for its OSIM business; with the weak retail environment and regional currency weaknesses, we believe there is further earnings risk on the downside. 
  • We lower our TP to SGD1.50, and downgrade to NEUTRAL (from Buy). 

 Seasonally weakest quarter. 

  • Sales were down 10.5% YoY in 3Q15, which is seasonally weakest. Net profit attributable of SGD6.2m included SGD4m of legal expenses incurred during the quarter (SGD7m YTD). Excluding this amount, the net profit was down largely due to lower operating leverage; some variable expenses such as commission-based remuneration were also lower. 

 Decline across most markets. 

  • There was decline across its core markets, especially at its OSIM business which accounts for the majority of revenue. In North Asia, management cited marked decline in Chinese tourists into Hong Kong as well as lower footfalls in mainland China malls. As the company rationalizes, during the quarter 14 OSIM outlets were closed, mainly in China and Malaysia. We believe with the significant decline in Ringgit, Malaysia as a market is no longer profitable. 

 Stay on track for TWG expansion. 

  • During the quarter, TWG opened two new stores in Hong Kong (currently four) and is expected to have 8- 10 stores there eventually. Sales remained steady in mature stores, though overall TWG remains unprofitable due to startup expenses. 

 Take stock of the strong share price run-up. 

  • Share price had a strong run in the last quarter, but we believe the trend is unsustainable with the poor earnings visibility risk. 
  • We cut our FY15-FY17F estimates by 16-30%, to account for the weaker conditions; the company remains in a strong net cash position of SGD232m. 
  • Our new TP of SGD1.50 (from SGD1.78) is pegged to 15x FY16F. The TWG minority shareholder dispute case will probably be concluded next month and a favorable outcome could result in some write-backs of provisions in 2016.

James Koh RHB Research | http://www.rhbinvest.com.sg/ 2015-10-28
RHB Research SGX Stock Analyst Report NEUTRAL Downgrade BUY 1.50 Down 1.78