OSIM International Ltd - Phillip Securities 2016-04-20: Set for Final Showdown

OSIM International Ltd - Phillip Securities 2016-04-20: Set for Final Showdown OSIM INTERNATIONAL LTD O23.SI 

OSIM International Ltd - Set for Final Showdown 

  • 1Q16 PATMI fall by 42% due to weak demand across the board. 
  • Remain strong net cash position but depleting cash reserves after dividend payout. 
  • Should the delisting plan fails, we will update our estimates and target price. 
  • Maintain recommendation to Accept Offer. The revised final ex-dividend offer price is S$1.39. 

Results key takeaways 

  • Logging its sixth consecutive quarters of negative yoy growth. 
  • Sales was down by 8% yoy in 1Q16 as demand slowed across the core countries. 
  • Demand has been slowing since 4Q14. Nonetheless, it managed to maintain its 1Q16 margins sequentially amid rising fixed cost pressures. 
  • Operating margin down from 11.3% in FY15 to 8.7% in 1Q16, on higher operating and startup costs; but marginally improved from 4Q15’s 8.4%. 

Diminishing cash positions. 

  • The Group’s cash and cash equivalents stood at S$353mn (excluding fixed income investments of S$42mn) as at 31 Mar-16, down from S$446mn (excluding fixed income investments of S$36mn) a year ago. 
  • The Group recorded a negative net cash flow of S$0.5mn in 1Q16 mainly due to S$7.4mn dividend payout during the quarter. Nonetheless, the Group remains a positive cash flow generative business and is still in a net cash position at S$208mn. 

One step forward, two steps back. 

  • While the Group adopts a cautious approach to invest for growth, it continues to rationalize unprofitable stores. 
  • Given the prolonged soft market conditions, the declining number of existing stores is unlikely to support the topline, while its new stores might take longer time to breakeven. 
    1. Cautious to open new outlets for TWG Tea. CAPEX for 1Q16 was S$1.2mn to open new and upgrade existing outlets and S$3.9mn in investment securities. 
    2. Store rationalization efforts proven to be effective as revenue per outlet improved. Total number of stores was reduced to 783 to 762, mainly from the exit of the Australian nutrition market. 

How do we view this? 

Losing devotion to payout dividend dampens sentiment. 

  • Despite there is no official dividend policy, its historical commitment to pay out annual dividend of 6 cents per share since FY12 (1 cent each on 1Q and 3Q, 2 cents payout for 2Q and 4Q), offers relief to shareholders somewhat – particularly during bad times. 
  • Last year’s dividend translated to an attractive yield of c.6%. 
  • We are not surprise there are no interim dividend declared in 1Q16 given the privatisation is in processing, it could also give a push to investors to sell their shareholdings. 

The revised final ex-dividend offer price of S$1.39 could be your last chance. 

  • We will update our estimates and target price if the delisting plan fails. 
  • Nonetheless, as mentioned in our previous report on 10 Mar-16, recall that the share price halved in FY15 in tandem to the magnitude of its earnings drop. 
  • Should Ron Sim failed to acquire at least 90% of the outstanding shares, where its privatisation plan comes to a halt, we think that the hype that drove the spike in its trading prices should ease off and revert to its pre-offer PE multiples (i.e. trading at 13-15x FY16E earnings). 
  • Given its disappointing 1Q16 results and the sluggish business landscape, investors may have to wait for a long time before earnings growth revives. 

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 an accelerated path to breakeven from its new TWG Tea stores. 
  • We maintain our recommendation as Accept Offer.

Soh Lin Sin Phillip Securities | http://www.poems.com.sg/ 2016-04-20
Phillip Securities SGX Stock Analyst Report ACCEPT OFFER Maintain ACCEPT OFFER 1.35 Same 1.35