OSIM International

OCBC on 8 May 2012

OSIM International Ltd (OSIM) reported 1Q12 PATMI of S$22.2m (+10.3% YoY, +30.2% QoQ), strongly exceeding our estimates by 19.4%. Sales was flat YoY at S$150.1m (+5.2% QoQ), due largely to a high base effect in 1Q11 and tracked closely with our forecast of S$149.2m. An interim dividend of 1 S cent was declared (payable on 13 Jun 2012), similar to 1Q11. We opine that management has executed well on its initiatives, as exemplified by continued productivity gains and the launch of innovative products which helped to boost its net margin by 1.3ppt YoY to 14.8% in 1Q12. We raise our FY12 and FY13 EPS forecasts by 7.5% and 4.9%, respectively, and also ascribe a higher valuation peg of 14.3x (previously 12.9x) to our projected FY12F EPS. This raises our fair value estimate from S$1.35 to S$1.61. Upgrade OSIM from Hold to BUY

1Q12 PATMI strongly exceeded our expectations
OSIM International Ltd (OSIM) reported 1Q12 PATMI of S$22.2m (+10.3% YoY, +30.2% QoQ), strongly exceeding our estimates by 19.4% due to better-than-expected margins. Revenue inched up 0.8% YoY (+5.2% QoQ) to S$150.1m, just 0.5% above our forecast. The flat YoY sales was attributed largely to a high base effect in 1Q11, as delays in shipment for its newly launched uDivine massage chair in 4Q10 spilled-over to 1Q11. An interim dividend of 1 S cent was declared (payable on 13 Jun 2012), similar to 1Q11 and in line with our expectations.

Strong execution on innovation and increasing productivity
Management’s focus on innovation resulted in a better product mix, while the rationalisation of non-performing outlets and push for higher productivity helped to boost its net margin from 13.5% in 1Q11 and 12.0% in 4Q11 to 14.8% in 1Q12. We expect continued earnings traction for OSIM moving forward, underpinned by new innovative product launches with different price points and improvement in productivity per store and staff. Regarding its RichLife business, management anticipates losses to be significantly smaller this year, with breakeven or profitability expected in FY13.

Expect continued resilience, upgrade to BUY
Given the better-than-expected 1Q12 performance, we raise our FY12 and FY13 EPS forecasts by 7.5% and 4.9%, respectively. We also ascribe a higher valuation peg of 14.3x (previously 12.9x) to our projected FY12F EPS, representing half a standard deviation above its 2-year average forward PER. We believe this is justifiable as OSIM has demonstrated its resilience and strong execution capabilities by improving its operational efficiencies in light of the challenging macroeconomic conditions. In addition, we opine that OSIM is steadily raising its profile as a luxury specialty retailer, comprising an amalgamation of strong brands, thus deserving a higher brand premium on its valuation. We upgrade OSIM from Hold to BUY, with a higher fair value estimate of S$1.61 (previously S$1.35).