OSIM International - DBS Research 2016-03-08: Deep value

OSIM International - DBS Research 2016-03-08: Deep value OSIM INTERNATIONAL LTD O23.SI 

OSIM International - Game theory starts now 

  • Founder and CEO offers to privatise OSIM at S$1.32 
  • 2nd to 7th largest shareholders can collectively hold out in a bid to get a higher offer price 
  • Shareholders should try holding out for a better offer wherever possible 

The privatisation offer 

Chairman and CEO offers to privatise OSIM. 

  • OSIM has announced that its Chairman and CEO Mr Ron Sim has made a voluntary unconditional cash offer for all the issued ordinary shares in the company. Mr Ron Sim is currently OSIM’s major shareholder with a stake of 69.25%. 

Offer price of S$1.32 per share. 

  • The offer price is S$1.32 per share, representing a 31.8% premium over the 1- month VWAP of Osim’s share price and a 33.5% premium over the 3-month VWAP, and a 7.8% premium over the last traded price of S$1.225. 

Valuation of 14x FY16F PE. 

  • The offer values the company at 14.4x FY16 PE and 2.32x FY16 P/B and a 3% premium over our target price of S$1.28. 
  • Could restructure after privatisation. 
  • We believe the privatisation allows Mr Sim to unlock value in the longer term. The potential to strip out OSIM, TWG and GNC brands in the future could help realise some hidden value in each of the individual brands. 
  • Besides, net outlay for the acquisition is not big in our view. 

No change to our earnings outlook 

We already have a BUY recommendation prior to offer announcement. 

  • We have previously upgraded OSIM to a announcement. 
  • BUY on attractive valuation, dividend yield and better earnings visibility post-4Q15 earnings. 
  • Our TP of S$1.28 was pegged to the average historical PE of 14x FY16F. 
  • OSIM’s share price has since gained 31% from S$0.94 to S$1.23 prior to the offer announcement. 

Outlook turning around, slightly better visibility. 

  • We note that annual sales growth have slowed from +15% in 3Q12 to -13% in 1Q15 (excluding the TWG acquisition). Although we are now less pessimistic on earnings visibility, the sales decline has been less severe in 4Q15 (- 5%) but it is still shrinking in absolute terms. 
  • More than 50% of OSIM’s sales are from massage products and these could likely be the drag on sales growth. OSIM will launch new products, expand franchise markets and adopt a more dynamic approach to marketing this year to support growth. 
  • At GNC, the closure of GNC’s loss-making Australian business will help the bottom line. 
  • TWG will continue to expand by 15-20 stores this year, while legal fees are likely to be lower this year. We have projected FY16F pre-ex EPS growth of 3%. 

Offer mechanics analysed 

  • Net S$129m t Net S$129m to acquire another 31% of OSIM. OSIM has net cash of S$172m equivalent to S$0.23 per share. Mr Sim’s gross cash outlay if he were to acquire all the shares he does not own will amount to S$301.3m. 
  • Taking into account the net cash of S$172m, his net outlay will therefore be c.S$129m. Nonetheless, the company has generated positive operating cashflows of S$23-109m from FY05-FY15 and can well afford to pay off its loans over the middle to longer term. 

2nd to 7th largest shareholders collectively own 13.79% of OSIM. 

  • OSIM’s shareholding structure is sporadic among minority investors. Based on OSIM’s shareholding shown on Bloomberg, six shareholders each owns between 1% and 6% of OSIM. 
  • According to Bloomberg, each of these shareholders has varying entry periods, ranging from 1Q12 to 2Q14. The period VWAP for 2012 is S$1.366, higher than the offer price. The period VWAPs for 2013 to 2015 are higher. We believe the shareholders, largely institutional funds, can collectively determine whether the current offer can be a success. 

Milestones for the offeror to achieve takeover success. 

  • Under the SGX listing manual, once the free float of a company crosses below 10%, trading of the stock has to be suspended due to insufficient free float. It is then up to the company to release more shares so that the stock can continue trading. In this case, the intention is to privatise and therefore we do not expect the stock to resume trading if that happens. 
  • The offeror will also earn the right of compulsory acquisition under the companies act if it reaches above c.96.9% shareholding. 

Offeror retains flexibility to increase offer price. 

  • The offeror did not include a “no revision to offer price” statement in its offer. This gives the offeror the flexibility to increase the offer price. Once a “no revision to offer price is made”, the offeror cannot increase the offer price further. 

There’s time, try holding out for a better offer 

Try to hold out for a better offer premium. 

  • Based on our VWAP analysis, we note that only 2010 and 2016 period VWAP of S$0.696 and S$0.964 came in below the offer price of S$1.32. Therefore, investors should try to hold out for a higher premium if possible. 

Watch the next few trading sessions. 

  • We believe how the offeror’s shareholding levels pan out in the next few trading sessions will be crucial for shareholders’ decisions. 
  • We highlight three signs investors can look out for to determine if a better offer price is likely to materialise: 
    1. If the market trades at above the offer price, it will be taking a stance that the offer price is too low. If the offeror buys at above the offer price in the open market, it must increase its offer to the highest price paid for the shares. 
    2. We believe the offeror may purchase shares in the open market when trading resumes. But if liquidity is poor, it could signal that the market is unwilling to give up its shares at the current offer price. 
    3. If 10% or more shareholders collectively hold out and do not accept the offer, it will make it difficult for the offeror to achieve the 90% shareholding threshold. 
  • The above scenarios may lead to the offeror increasing the offer price, subject to its desire to privatise the company.

Alfie Yeo DBS Vickers | Andy Sim DBS Vickers | http://www.dbsvickers.com/ 2016-03-08
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