OSIM International

UOBKayhian on 5 Feb 2013

Valuations

·         Downgrade to HOLD with a lower target price of S$1.84, derived from the average of our dividend discounted cashflow model and pegged to 3-year historical PE of 15x 2013F earnings. Entry price: S$1.60.

·         Its share price has gained 19.6% since our last report on 25 Oct 12, and we think most of the positive catalysts for 2013 have been priced in.

Results

·         OSIM reported a healthy set of 2012 results with net profit registering a 25.8% yoy growth to S$86.9m. This set of results is in line with our net profit forecast of S$87.1m but exceeds market expectations of S$85.7m. 

·         Revenue increased 8.5% to S$615.8m, driven by an improvement in sales and the launch of newer innovative products. However, the total number of outlets continued to rationalise across most business segments to 1,137 from 1,157 stores as at 30 Sep 12. Expansion of OSIM in China has also been slow with a net increase of six stores against the initial target of 50 for 2012. OSIM targets to open 30-40 OSIM stores in China for this year.    

·         Gross profit gained 10.0% yoy to S$435.0m with gross profit margins improving marginally to 70.7% (2011: 69.7%) as OSIM saw robust demand from higher-margin products.

·         The company generated strong EBITDA of S$126m due to a better product mix and higher productivity. As at 31 Dec 12, OSIM had cash and cash equivalents of S$202m

Our View

·         We had flagged to investors in our last report that OSIM presents one of the best investment opportunities around with improving sales, gross margins and net profits, backed by a strong dividend payout and continued share buy-back. Share price has risen 19.6% since then, outperforming the index’s advancement of 8.3%. 

·         Going forward, we expect earnings growth to slow as the group will be more focused on productivity and higher operating margins rather than aggressive store expansion.

·         We thus reduce our revenue and net profit forecast to S$684.9m (+11.2% yoy) and earnings to S$97.1m (+11.7% yoy) respectively for 2013. We expect the company to maintain a dividend per share of 6 S cents for 2013, providing investors a yield of 3.3% as of last traded price.

·         Factors that will constitute an upgrade in target price or recommendation include either:

a)      Revenue growth of 21.3% for 2013 against the forecasted 11.7% (2012: 8.5% yoy), or

b)      EBITDA margins of 24.2% against the forecasted 21.4% (2012: 21.0%), or

c)       Dividend payout ratio of 66.0% against the forecasted 50.0% (2012: 50.0%)