OSIM International - CIMB Research 2016-04-20: Take the offer, alternative will be a long wait

OSIM INTERNATIONAL LTD O23.SI

OSIM International - Take the offer, alternative will be a long wait

1Q16 net profit was below expectations, making up 14%/13% of our/consensus full year estimates, due to decline in sales and TWG operational cost pressures.
High gross margin was maintained but sales still declined yoy in 1Q16. 1Q North Asia sales were -2% yoy, while South Asia sales were -8% yoy.

With a tough discretionary spending backdrop in Asia, shareholders who reject Ron Sim’s privatisation offer must be prepared to wait for a long time for a better option.
The S$1.39 offer is the only thing holding up price. If it fails to get 90% acceptance and OSIM stays listed, we expect the share price to fall.

Poor 1Q16, apparent recovery in 4Q15 core earnings did not hold OSIM’s 1Q16 results painted an unchanged, gloomy picture for discretionary spending.
1Q16 net profit (S$7.8m) was in the 3Q-4Q15 range (S$6m-9m/quarter) but 1Q16 was discouraging, as 4Q15 included S$10m one-off costs that previously suggested core earnings were turning around.
2015 (S$51m net profit) had the benefit of a relatively strong 1H. At current quarterly net profit run-rate, we expect estimates to get cut ahead.

The contracting sales trend remained evident in 1Q16 and seems to have deteriorated compared to 4Q15. Arguably, this is no longer a surprise.
Overall 1Q16 sales were -8% yoy. 1Q16 North Asia sales (-2.5% yoy) showed some signs of stability but South Asia sales (-8% yoy) were poor and rest of world sales (-56% yoy) were extremely bad.
OSIM highlighted TWG operational cost pressures as a negative for profits.

Given the prolonged soft market conditions, management plans to be cautious in investing and will further rationalise stores. OSIM outlets were reduced from 534 (end- 2015) to 516 at end-1Q16.
OSIM is hopeful that 2016 prospects will be supported by new products such as uMagic, uInfinity Luxe, uDiva Classic, and uPamper2. We are not as hopeful.
In the past, new products stoked short-term profitability but the anticipated blockbuster uMagic did not work its magic in 2015. We do not see how that will change.

In our opinion, the current S$1.39 (ex-dividend) privatisation offer is the best option on the table for investors.
We do not doubt that Ron Sim will relist his business in future, when profits eventually recover.
The offer values OSIM at 19.2x CY16 P/E. The poor 1Q16 results suggest that FY16 estimates have downside risk and the privatisation offer values the company at peak P/E range (> 20x).
The closing date of the offer is 29 Apr.

If Ron Sim fails to garner 90% of the OSIM shares that he does not own, nor reach the 90% ownership mark (and he does not come up with another offer), we believe OSIM’s share price will fall back to the 13-15x CY16 P/E range. This suggests that there is almost 30% possible downside to a fair trading market price.
We think this is as good as it gets. Our $1 target price (13x CY17 P/E, unchanged) remains.
Downgrade from Hold to Reduce, with the view that successful privatisation is not guaranteed.

Kenneth NG CFA CIMB Securities | Jonathan SEOW CIMB Securities | http://research.itradecimb.com/ 2016-04-20

CIMB Securities SGX Stock Analyst Report REDUCE Downgrade HOLD 1.00 Same 1.00