OSIM International Ltd - Phillip Securities 2016-02-01: Don’t panic, just need for a Massage

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OSIM INTERNATIONAL LTD O23.SI 

OSIM International Ltd - Don’t panic, just need for a Massage 

 Exciting year ahead with product pipeline filled and scheduled.
 Attractive dividend yield. Declared final dividend of 2 cents per share as expected.
 Lower TP from S$1.44 to S$1.35 but maintain Buy rating.

Results at a glance 

• Earnings below expectation. 
• Despites 4Q15 sales were better-than-expectation, net profit was 55% off our expectation due largely to lower than expected gross margins expansion, higher legal costs as well as $5.6m loss on de-consolidation of ONI Australia. 

Analyst briefing key takeaways 

Tense time on challenging macro landscape. 

• Soft demand across the core countries, sales FY2015 was down 10%. Stable gross margin despite a challenging year, remains a positive cash flow generative business. 

One-off expenses stretched profit growth into a downward pose for 2015. 

• If adjusting for deduction of one-off expenses for the year: 
  1. $10.1m for TWG Tea legal expenses in HK and SG; and 
  2. $5.6m loss on deconsolidation of ONI Australia, EBITDA could have held up above $100m mark (at $107.7m, or an EBITDA margin of 17%). 

New blockbuster massage chair later in 2016, with other small ticket items launching soon. 

• The Group would continue to 
  1. invest for growth – supported by a strong balance sheet; and 
  2. invest in new innovative products and marketing dollars to generate demand. 

How do we view this? 

• Lesser compression from the plaguing legal burden and the de-consolidation of ONI Australia which could save up to $3.5m a year would loosen up the Group’s budget. 
• The saved cash flow and expenses could be invested to create future growth. 
• Attractive dividend yield offers a relief to investors. 
• No official dividend policy but management shared that it would strive to maintain annual dividend of 6 cents per share for FY16, translating to an attractive yield of c.6%. 

Investment Risks 

• Global economy slowdown faster than expected 
• Prolonged legal case 
• Change of consumer behavior 

Investment Actions 

• Facing current sluggish environment while taking into account of its latest expansion plan, we made amendments to store counts and revised downward FY16e earnings by 16% to S$54 mn, which would translate to a 15x FY16E PER. 
• We maintain Buy rating with a revised TP of S$1.35, change WACC from 8.8% to 9% and reduce terminal growth from 2.8% to 1.8% (the last ten years average inflation rate in Singapore).

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-02-01

Phillip Securities SGX Stock Analyst Report BUY Maintain BUY 1.35 Down 1.44