OSIM International - UOB Kay Hian 2016-01-29: 2015 ~ No Turnaround Until 2017

OSIM INTERNATIONAL LTD O23.SI

OSIM International (OSIM SP) - 2015: No Turnaround Until 2017

OSIM’s 2015 net profit shrank 50% yoy to S$51.5m on weaker sales, S$10.1m legal fees for TWG and a S$5.6m loss when ONI Australia entered into voluntary administration.
Excluding these non-operating expenses, core profit would have been S$67.2m, 2.6% below our estimate of S$69m.
We believe weak consumer sentiment will persist into 2016 as management already sensed weakness in January.

... representing 97.4% and 95.7% of our and consensus full-year estimates respectively. OSIM International’s (OSIM) sales and net profit continued to decline in 2015.
Revenue falling 10.3% yoy to S$619.6m and core net profit declining 34.2% yoy to S$67.2m.
Management attributed the weaker profitability on softer retail sales across core countries, namely Singapore, Malaysia and Hong Kong.
The company also had to expense off S$10.1m in legal fees for the TWG Tea shareholders’ tussle and the Hong Kong trademark final appeal as well as a one-off S$5.6m loss when ONI Australia entered into administration.
According to management, ONI Australia had chalked up an average loss of S$3.5m per year in the last three years. Including these non-operating expenses, net profit declined 50% yoy to S$51.5m.

With lower revenue and higher rentals and employment benefits from the TWG expansion, core operating EBITDA margin dropped 4.6ppt yoy to 17.3% and net margin fell 3.9ppt to 10.8% in 2015.

The company paid out total dividend of 6 S cents/share for 2015, flat yoy and in line with our forecast of 6 S cents. As at 31 Dec 15, OSIM had net cash of S$211m.

Management remains optimistic on 2016 despite seeing weak sales in January. This year, OSIM will roll out Ujoy massage chair, UDiva Star and UGallop 2.
Without sharing too much details, OSIM will also introduce a new mid-range massage chair in May/June.

Using a rough estimate by management that half of the S$10.1m legal fees were borne by the 70%-owned TWG subsidiary, operating losses for the business would have been manageable at S$0.65m.
OSIM ended the year with 52 TWG outlets and expects to add another 15-20 stores in 2016. With that in mind, we project the business to turn profitable at S$1.6m excluding any legal expenses.

Economic uncertainties will weigh on consumer sentiment and retail sales, particularly discretionary products like OSIM’s lifestyle equipment.
The yoy growth in the retail sales index for the furniture and household equipment segment in Singapore fell for three consecutive months until Nov 15, a trend similar as in Hong Kong.
In addition, with the ringgit weakness and GST implementation, OSIM’s Malaysia sales will be adversely impacted.

We cut our 2016 and 2017 net profit forecasts by 19.4% and 26.5% to S$57.2m and S$59.3m respectively on the back of the 12.8% contraction in revenue per store for OSIM and ONI Global, but assume flat same-store sales for TWG.
We also reduce our dividend forecast to 4 S cents/share (from 6 S cents).

...as we cut our earnings forecasts for the next three years. Our target price is based on a two-stage DCF valuation (cost of equity: 8%, terminal growth: 0.8%). Entry price is S$0.76.

Our target price of S$0.88 has an implied 2016F PE of 11.8x, compared with its 5-year and 7-year average PE of 16.9x and 15.2x respectively.
With the operating headwinds, we believe OSIM’s earnings will only bottom in 2016.
Consensus earnings estimate has been too optimistic, which could now see a slew of earnings downgrades. OSIM is currently trading at 13.1x 2016F PE (ex-cash: 8.5x) with a dividend yield of 4.3%.

Brandon Ng CFA UOB Kay Hian | http://research.uobkayhian.com/ 2016-01-29

UOB Kay Hian SGX Stock Analyst Report HOLD Maintain HOLD 0.88 DOWN 1.42