OSIM International - DBS Research 2016-01-29: Deep value

OSIM INTERNATIONAL LTD O23.SI

OSIM International - Deep value

We turn positive on OSIM after a > 40% share price decline since we downgraded the stock in October 2015.
Valuations are attractive with dividend yield at close to 7% and forward PE (c.10x) at close to -1SD of its 7-year mean (14x).
4Q15 earnings showed sequential improvement with signs of bottoming out. We believe this will support DPS and dividend yield going forward.

We hence do not see further downside pressure on the stock. Instead, earnings recovery momentum and valuation from a PE basis lead us to believe that OSIM’s share price reflects value.
Our PE-based TP of S$1.28 is premised on modest earnings growth in FY16F and its target PE of 14x at historical mean. This represents 36% potential return from its current share price, and dividend yield (based on DPS of 6 Scts) at its target price is 4.7%.

4Q15 has recorded a smaller than expected earnings decline.
Core earnings (S$18m, -35% y-o-y) for 4Q15 was above expectations while the decline in revenue (S$169m, -5% y-o-y) moderating on a sequential basis.
Sequential quarter growth in 4Q15 (vs 3Q15) was broad based, led by all three brands and the Hong Kong market.
OSIM has continued to pay 6 Scts DPS from its strong balance sheet even though core earnings fell by close to 40%.
With earnings decline seen projected to stabilise and its net cash of S$200m, we see limited risks of dividend cuts at this stage.
Downside risk should therefore be minimal.

Our target price of S$1.28 is based on 14x FY16F PE. OSIM has strong net cash, cheap PE valuation, and is showing narrowing y-o-y sales decline.
Our target PE valuation of 14x is pegged to the stock’s average 7-year historical mean valuation.

Our positive view is based on earnings bottoming out and attractive dividend yield.
Earnings risks and hence reduction in DPS would dampen our optimism on the stock.

Alfie Yeo DBS Vickers | Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2016-01-29

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