Osim International

UOBKayhian on 21 Jan 2014

OSIM has increased its stake in TWG Tea from 53.7% to 70% via a rights issue. The funds will be utilised mainly for expansion and to repay a bank loan and a shareholder loan. We had highlighted before that that TWG Tea has the potential to scale up significantly in the next 3-5 years and become a meaningful earnings contributor to OSIM.

VALUATION

• We maintain BUY but at a higher target price of S$2.85 as we take into account the increased contributions from TWG Tea. This is derived from our dividend discounted cash flow model and pegged at its 3-year historical PE of 14.8x to 2014F earnings.

INVESTMENT HIGHLIGHTS

• OSIM has increased its stake in TWG Tea from 53.7% to 70% by investing another S$25m via a rights issue. We applaud the move as we had highlighted before that TWG Tea has the potential to scale up significantly in the next 3-5 years and become a meaningful earnings contributor to OSIM.
• According to the CFO, there were 25-27 TWG boutiques as at Dec 13 and OSIM could potentially expand the network further in Singapore, Korea, Thailand, China and Malaysia. This is a huge jump from 31 Mar 13 where TWG Tea had 12 boutiques with S$42m in revenue and S$6m in earnings. We also believe that operating margins are likely to improve as TWG can enjoy economies of scale by adding more retail outlets with one central kitchen in each country.
• Our back-of-the-envelop calculation also suggests that investing S$25m in the rights issue and increasing its stake from 53.7% to 70% will value TWG’s business at S$46.5m or 4.2x 2013F PE. This valuation is undemanding as compared to OSIM’s valuation (17x 2013F PE) or other premium brand product companies.
• OSIM is also set to announce its 2013 results on 27 Jan 14. We expect the company to report a recurring net profit of S$108m after consolidating TWG’s earnings. However, OSIM did announce in a profit guidance that there would be material gains arising from the re-measurement of TWG investment, a material charge for making provisions for and impairing the assets on ONI Australia and a material charge for impairing the Brookstone senior preferred notes. But overall, the above events are expected to have a positive impact