OSIM International Ltd - Phillip Securities 2016-03-10: Potentially raise the bet

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OSIM INTERNATIONAL LTD O23.SI 

OSIM International Ltd - Potentially raise the bet 

• Unconditional cash offer of S$1.32 to delist and privatise OSIM International Ltd. Our last rating is Buy with TP at S$1.35. 
• Recommend minority shareholder who have their investments in-the-money to accept offer, otherwise, adopt a wait-and-see approach. 

What’s new and How do we view this? 

Ron Sim made an unconditional cash offer of S$1.32 to privatise OSIM International Ltd. 

• Post-privatisation, the Group may undergoes restructuring where TWG Tea business segment, which has higher growth and intrinsic value, could be stripped out, as its massage chair business hits a plateau in a highly competitive market in China. 

An offer you cannot refuse? 

• The offer price represents a premium of c.31.8% and 33.5% to the volume-weighted average price (VWAP) per share for the corresponding 1-month and 3-month periods, up to and including 29 Feb-16, respectively. 
• Recall that the share price halved in FY15, but it is justified by the magnitude of its earnings drop amidst weak market sentiment. 
• OSIM, currently trading at a price higher than the offer price, reflects that the minority shareholders are rejecting the offer in a bid of higher offer price. 
• Investors could be expecting a higher long-term intrinsic value than S$1.32, as the recent earnings was weighed by legal costs while its China’s TWG Tea businesses are still under gestation and have yet to breakeven. 
• Notwithstanding that, according to Bloomberg data, the next top 3 major shareholders have a combined ownership of 9.68%, led by Capital Group of 5.2% and follow by Morgan Stanley, and Macquarie Group. If they jointly rejected the takeover offer, it is highly likely that Ron Sim’s plan to delist the company could be blocked. 
• Should Ron Sim failed to acquire at least 90% of the outstanding shares, one of the two possible scenarios could unfold: 
  1. a higher second offer price; or 
  2. delist and privatisation plan comes to a halt. 
• To acquire the remaining 31%, Ron Sim will requires a capital of c.S$301mn at the current offer price. Taking into account of OSIM’s net cash as at 31 Dec-15 at $211mn, and it’s capacity to generate positive cash flow last year despite weak sentiment (FY15 EBITDA adjusted for ONI Australia consolidation stood at S97mn), we think the net outlay for this acquisition is not big. 
• Given its current trading price being higher than the offer price, we believe that Ron Sim would potentially raise his offer by another 5-10%, which he would need to cough out additional costs up to S$30m. 
• Or, if Ron Sim is not rushing to delist the company, he could always wait for a better opportunity and pay a special dividend to cover his costs. 

Investment Actions 

• As such, against the backdrop of meek global macro environment, it is unlikely to see a rebound from the sales of its core margin driver – the massage chairs, as well as a relief from the legal burden, in near term, we would recommend minority shareholder who have their investments in-the-money to accept offer, otherwise, adopt a wait-and-see approach. 
• Our last rating is Buy with a TP of S$1.35.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-03-10

Phillip Securities SGX Stock Analyst Report ACCEPT OFFER Maintain BUY 1.35 Same 1.35