OSIM International - Maybank Kim Eng 2016-01-29: Not yet at a major re-rating point

OSIM International - Maybank Kim Eng 2016-01-29: Not yet at a major re-rating point OSIM INTERNATIONAL LTD O23.SI 

OSIM International (OSIM SP) - Not yet at a major re-rating point 

Short-term bounce likely, conditions still uncertain 

  • OSIM has been sold off on overly-bearish expectations. 
  • A 4Q15 beat should see the stock bounce from oversold conditions. 
  • Maintain HOLD as we expect 1H16 conditions to remain soft. 
  • But OSIM is looking increasingly attractive on valuations and the appearance of positive catalysts could see the stock rate up. Such catalysts could include a privatisation of OSIM and spin-off of TWG, which we think 68.6%-owner Ron Sim should consider. 
  • Our TP of SGD1.20 is based on 8.5x EV/EBITDA, or 15x FY16 P/E, its 10-year historical mean. 

A stronger beat in 4Q15 

  • NP of SGD9.3m included SGD9m in TWG legal costs and one-off charges from GNC Australia’s closure. 
  • Core NP of SGD18m beat our forecast of SGD13.6m, while full year core NP of SGD67.5m was 7-8% above. 
  • Overall, 4Q15 was not as bad as the market had anticipated, with some having estimated that OSIM could have been in the red given the chaos in China, its biggest market. 
  • Final DPS was maintained at 2 SGD cts, or almost 100% payout of SGD6 cts for the full-year. 

But challenging to maintain that beat 

  • 4Q15 was boosted by China online sales, especially the Singles Day sales, which only comes once a year on 11 Nov. 
  • Conditions in the core ASEAN and China OSIM markets are expected to remain challenging into 1H15, while TWG is expected to maintain its torrid 15-new store a year expansion. 
  • On the plus side, cost inflation could ease as management expects store rental and employee hiring conditions to improve. 
  • Still, we expect OSIM to maintain a full year DPS of 6 SGD cts. 

Consider a privatisation + spin off 

  • OSIM could consider a privatisation and spin-off of TWG at this price. 
  • It trades at < 6x EV/EBITDA – a takeout sweet spot - vs peers’ 12x. 
  • Buying over minorities and CBs will need c.SGD424m for an all-cash deal at today’s prices or SGD505m, if done at 8.5x EV/EBITDA (SGD1.20). 
  • Financiers will be backed by OSIM’s c.SGD400m cash and cashflow from the chairs business. 
  • To privatise at a lower cost, the option to take shares in a separately-listed TWG instead of cash could also be offered. 

Gregory Yap Maybank Kim Eng | http://www.maybank-ke.com.sg/ 2016-01-29
Maybank Kim Eng SGX Stock Analyst Report HOLD Maintain HOLD 1.20 Down 1.49