OSIM INTERNATIONAL LTD
O23.SI
OSIM International - Privatisation bid in tough times
- Ron Sim has made a privatization offer of S$1.32 for the remaining 30.75% of shares that he does not own.
- The offer represents a good 32-34% premium over the 1- and 3- month VWAP price. It represents 18.2x CY16F P/E. OSIM’s trading range is 10-22x P/E.
- We believe minority shareholders should take up the offer.
Privatising bid in tough time
- We believe that the offer was made to take out the company as it goes through a rough patch. OSIM’s earnings has been hit by stalled discretionary spending in Asia, TWG startup expenses and a series of one-off costs.
- In 2013-15, OSIM made core net profit of S$97-102m when the operating environment was kinder and new expenses (TWG, legal, etc) were not weighing on its profits. FY15 profits halved to S$52m as massage chair sales declined, and the costs came in.
- FY15 included S$10m of one-off expenses (ONI termination and legal fees). It also included TWG roll-out expenses. We estimate that the core net profit of the ex-TWG business would be S$60-65m range. We expect 2016 earnings to fall short of S$60m.
Our view on why the offer now
- The outlook in the next year or so, is not great. A global slowdown is happening and a recovery in chair sales is not likely to happen in 2016. There would still be some legal expense and TWG expenses to book.
- For the minority, the offer represents a chance to exit and switch the capital to other bargains currently. For Ron Sim, the offer probably represents a positive three-year view on the company, when the macro environment should become kinder, one-off expenses would have all been flushed out and TWG starts contributing.
- At the current offer price, it would cost Ron Sim ~S$352m to privatize the company. If successful, Ron Sim will also get access to the net cash of S$211m sitting in the company. The cash pile is useful for the founder to de-gear his privatisation attempt.
Our view on where offer valuations stand
- Discretionary consumer companies that can make high gross margins have a lot of operating leverage when sales are good. They can trade above 20x P/E in such times.
- However, such times are clearly not a likely event in the near future (2016); the offer represents a good exit price, in our view, for an investor with a 1-2 year investment timeframe.
What you should do
- Our current long-term rating is Hold, Our target price is based on 13x CY16F P/E (-1 s.d. level), a valuation multiple that we deem appropriate for the current climate. The share price is likely to trade close to offer price of S$1.32 when suspension ends.
- We believe minority shareholders should accept the offer. If Ron Sim gets close to the 90%-mark, there might be grounds to speculate on a second offer, But, if the takeover offer falls way short of 90%, we believe that would be unlikely. In that case, we believe the likelihood is that the trading price would slip back to around 14-15x P/E.
Kenneth NG CFA
CIMB Securities
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Jonathan SEOW
CIMB Securities
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http://research.itradecimb.com/
2016-03-07
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