OSIM International - UOB Kay Hian 2015-10-28: 9M15 ~ When It Rains, It Pours

OSIM INTERNATIONAL LTD O23.SI

OSIM International (OSIM SP) - 9M15: When It Rains, It Pours

OSIM’s 9M15 net profit contracted 44% yoy to S$42m on weak sales from OSIM’s core business and GNC/RichLife stores, as well as the impact from having to pay S$7m in legal fees.
We believe weak consumer sentiment will persist throughout the year as management acknowledges the challenges in the retail market.
Maintain HOLD with a target price of S$1.42.
Continued share buybacks will likely limit downsides. Entry price: S$1.21.

OSIM International’s (OSIM) sales and net profit continued to contract with 9M15’s revenue falling 12% yoy to S$451m and net profit declining 44% yoy to S$42m, on the back of weakness in the retail environment across its major markets.
The company also had to expense off S$7m in legal fees for the TWG Tea shareholders tussle and the Hong Kong trademark final appeal. As both cases will conclude only in the next six months, such fees are likely to continue but at a smaller extent.
Excluding non-operating legal fees, net profit would have come in at S$49m, representing a significant 35% yoy decline.

The TWG expansion in 9M15 led to higher operating costs that caused EBITDA in 9M15 to drop 37% yoy to S$71m. Accordingly, net margin fell 5.3ppt to 9.3% in 9M15.

The company had paid out a total of 4 S cents/share for 9M15, in line with our forecast of 6 S cents for the year, flat yoy. As at 30 Sept, OSIM was in a net cash position of S$232m.

The company saw a double-digit decline in OSIM sales and a single-digit decline in GNC sales. In particular, OSIM revealed the drag mainly came from Malaysia, due to the currency fluctuations and lower foot traffic in Singapore. While management assured us of a strong product pipeline in the near future, including uDiva classic, uGallop2 and uCrown, we expect the weakness in sales to extend into 1H16.

Losses for the business segment sustained into the quarter as expansion slowed while operating efficiency is yet to be seen. OSIM ended the quarter with 49 TWG outlets and expects to have a total of 52 outlets in 2015 as compared with 58 outlets as previously guided. We believe progress for the government approvals of outlets in Beijing and Guangzhou could have been slow which led the company to refocus its effort in Shanghai.

In early-October, Taiwan's Food and Drug Administration reported that they had found excessive levels of pesticide residues in TWG Tea's "Chamomile Green Tea". Management has clarified that the company had never authorised sales of any teas which were not deemed compliant and the chamomile tea in question has never been put up for sale or available in any of their retail points globally. Three weeks after, a lawsuit was filed against GNC Holdings Inc, ONI Global’s GNC franchisor, claiming that the company had knowingly sold products spiked with two synthetic drugs, Picamilon and BMPEA. Picamilon is a prescription drug in Russia that treats neurological conditions and BMPEA is a synthetic amphetamine-like chemical.
GNC Holdings Inc responded, saying that the claims are without merits and intends to defend themselves aggressively. OSIM also clarified that its GNC stores does not retail the affected GNC products.
While we believe that there have been no wrongdoings on OSIM’s part, it could have a negative impact on the sales in the near term.

CEO Ron Sim continued to accumulate shares from the market post the 2Q15 results, adding close to 5m shares to his stake at an average price of S$1.49. Similarly, the company conducted a series of share buybacks, accumulating 5.0m shares at a weighted average cost of S$1.61.

We cut our 2015 and 2016 net profit forecasts by 32.6% and 28.4% to S$60.0m and S$70.9m respectively on the back of lower revenue per store, escalating operating costs and unexpectedly high legal fees.

Maintain HOLD with a lower target price of S$1.42, as we cut our earnings forecast for the next two years. This is based on a two-stage DCF valuation (cost of equity: 8%, terminal growth: 0.8%), which implies 15.2x 2016F PE.
At the current share price, OSIM is trading at an ex-cash 2016 PE of 13.8x with a dividend yield of 3.72%.

JBrandon Ng CFA UOB Kay Hian | http://research.uobkayhian.com/ 2015-10-28

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 1.42 DOWN 1.56