OSIM INTERNATIONAL LTD
O23.SI
OSIM International - Still too early to massage into an Add
- After a disastrous 3Q, expectations were low. 4Q15’s 66% yoy decline in net profit was therefore deemed in line, and would have exceeded if not for one-offs.
- No change to gross margins at more than 70%. But
- negative operating leverage,
- TWG rollout expenses and
- one-offs dragged down OP margins.
- Management hinted at new products this year, but sales may not materialise just as uMagic disappointed in 3Q15.
- OSIM is net cash and generates positive FCF. No threat to DPS of 6 Scts (6% yield). Our target price of S$1.00 (13x CY17 P/E) is pegged to -1 s.d. levels. Upgrade to Hold.
■ Still caught in a weak retail environment
- Operationally, not much has changed since 3Q:
- overall end-demand is still soft,
- OSIM is still in a period of store rationalisation and
- South Asia remains the bigger drag.
- 4Q’s 66% yoy decline in net profit (S$9.3m) was therefore not a surprise as we already expected weak results. However, 4Q15 also included one-offs from legal expenses (S$3.4m) and the deconsolidation of ONI Australia (S$5.6m). In this context, 4Q was better than expected.
- FY15 net profit was 98% of our forecast.
■ One-offs hit OP margins, but were not the only reason
- FY15 carried the bulk of TWG’s legal expenses (S$10.1m). Both cases are still pending judgment, and management guided that 2016 should see lower legal expenses.
- ONI Australia is also undergoing voluntary administration and the group took a S$5.6m writeoff.
- Not including these, FY15 OP margins (14%) were still lower vs. FY14 (19%), mostly due to
- negative operating leverage and
- TWG start-up costs.
- We expect margins to stay at these lower levels.
■ New products unlikely to spur sales growth
- History shows that its business model of creating demand with new product launches and celebrity-helmed A&P does not work in economic downturns.
- Sales in 2007/08 declined by 12-16% yoy as it pruned 5-9% of OSIM stores.
- Store closures in 2015 (-5% yoy) mirror the previous downturn.
- Hence, given the current bleak environment, we do not expect a big uptick in sales even as OSIM has new product launches in the pipeline.
■ But are we being too negative? Recovery in North Asia 4Q sales
- While 4Q15 group sales declined 5% yoy, it is a vast improvement on the 12% decline over 9M15. In particular, North Asia’s 4Q sales (+3% yoy) finally turned a corner after three consecutive quarters of yoy declines. Further, management expects to save S$3.5m p.a. after deconsolidating its loss-making ONI Australia.
- While OSIM is caught in a weak macro retail environment, it is still profitable and generates positive FCF.
■ Current levels imply c.6% yield; upgrade to Hold
- The stock has retraced c.42% since our downgrade in 3Q15 and trades at 13x CY16 P/E, in line with its -1 s.d. levels of 13x (past 5 years). OSIM has net cash of S$211m (30% of market cap) and offers a yield of c.6%.
- Management guides that it intends to maintain its 6 Scts DPS.
- We think these levels should provide share price support, while greater earnings visibility could be a catalyst. For these reasons, we upgrade to Hold even as we lower our target price following EPS cuts on lower sales and OP margins.
Kenneth NG CFA
CIMB Securities
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Jonathan SEOW
CIMB Securities
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http://research.itradecimb.com/
2016-01-29
CIMB Securities
SGX Stock
Analyst Report
1.00
Down
1.13
