OSIM

OCBC on 8 June 2012

We expect OSIM International’s (OSIM) earnings momentum to continue in FY12, underpinned by innovative product launches and its strong focus on improving productivity and operational efficiencies. We believe that OSIM is on track to deliver earnings that would exceed consensus’ expectations of S$81.2m in FY12. OSIM has also developed a stronger brand equity and is in a better financial health since the last financial crisis, in our opinion. This would enable to group to withstand the current macroeconomic uncertainties. Recent share buyback activities would also enhance shareholder value and lend support to its share price. We retain our forecasts, BUY rating and fair value estimate of S$1.61, which implies total potential returns of 42.8%.

Expecting earnings momentum to continue
We expect OSIM International’s (OSIM) earnings momentum to continue in FY12, following its recent solid 1Q12 performance. During our meet up with OSIM recently, management updated us that demand for its uDivine massage chair and uPhoria leg massager continued to remain robust. We expect the launch of new products such as the uSoffa Runway and uDivine App to further drive its sales growth. In addition, the rationalisation of non-performing outlets and focus on improving its productivity underpins our forecast for OSIM to expand its net margin from 12.5% in FY11 to 13.7% in FY12. We believe that OSIM is well-positioned to deliver earnings that would exceed consensus’ expectations of S$81.2m in FY12, if it manages to sustain its current growth trajectory and operational efficiencies.

Healthy balance sheet to weather the macro uncertainties
While the macroeconomic environment continues to be with fraught with volatility and uncertainty, we expect OSIM’s healthy balance sheet (net cash of S$52.7m as at 31 Mar 2012) and strong free cashflow (FCF) generating ability to buttress its financial resilience. In our opinion, OSIM has transformed itself into a stronger entity with a healthier financial position and better brand equity since the last financial crisis. We forecast OSIM to generate S$80.8-89.5m of FCF over FY12-13F. This would bolster the group’s capacity to pay out decent dividends. Meanwhile, we believe that OSIM’s share buyback activities in recent weeks would enhance shareholder value, lend support to its share price and send a positive signal to investors.

Valuations undemanding, maintain BUY
We retain our forecasts, BUY rating and fair value estimate of S$1.61. This implies total potential returns of 42.8%, including a 3.0% prospective dividend yield. In our opinion, valuations are undemanding, with the stock trading at our FY13F PER of 9.1x, versus a projected EPS CAGR of 11.3% from FY11-13F, while offering an ROE of 36.0% (our FY13F estimate).