OSIM International

UOBKayhian on 26 Nov 2013

Let’s have tea!

• OSIM has increased its stake in TWG Tea to 53.7% and will consolidate the latter’s earnings into its financial statements going forward. As OSIM looks to expand the outlets further in 2014, we believe this segment may eventually become a meaningful earnings contributor in the medium term.

VALUATION

• Maintain BUY and target price of S$2.76, derived from our dividend discounted cash flow model and pegged at its 3-year historical PE of 15.7x to 2014F earnings.

INVESTMENT HIGHLIGHTS

• OSIM reported its 19th consecutive set of record quarterly earnings in 3Q13 with net profit growing 16% yoy to S$23m. This was driven by strong revenue growth from new products and higher sales per store and per salesperson. Management remains upbeat on earnings outlook after sales of their uAngel and uInfinity massage chairs gained traction in the quarter. Management has also seen several trade-ins of the uDivine chairs, a product launched three years ago. This shows that OSIM is on the right track in creating long-term demand and brand loyalty to its OSIM chairs.
• TWG Tea - the next crown jewel for OSIM. There are currently 22 TWG boutiques and OSIM targets to expand the network further in Singapore, Korea, Thailand and Malaysia. OSIM reiterated that each outlet continues to be profitable on its own with an annual 3-5% yoy same-store sales growth. In China, TWG Tea has penetrated into 60 luxury hotels and OSIM has plans to open 6 tea boutiques in the country next year.
• Building a cash war chest with EBITDA margin of more than 20%. OSIM continues to generate very strong cash flow due to its cash-based business and low working capital needs. As at 30 Sep 13, OSIM had cash and cash equivalents of S$283m. 
• Although management still maintains its profit guidance of a 15% growth in bottom line, we believe the company can exceed expectations and record a net profit of S$108.1m (+24.3% yoy) in 2013. The company is also expected to maintain a dividend payout of 6 S cents/share for 2013, providing a yield of 2.7% as of the last traded price.