OSIM International

Kim Eng, 2 Sep 2014

• No acquisition target yet but clear on what will pique its interest. Maintain BUY and SGD3.50 TP on 20x FY15E EPS. Catalysts from signs of greater new product traction in 2H14.
• Shareholders will be protected. No dilution if enough shares are repurchased, similar to 2011 CBs.
• Steady sales growth so far in 2H14. Eyeing North Asia for TWG store expansion and to add franchisees internationally.

Clear on where it wants to spend the money
OSIM may not have a specific target for acquisitions yet using the proceeds from its recently-issued SGD170m convertible bonds due 2019, but it is very clear on the kind of companies it wants to buy. They must be positioned at the mid- to upper end of the well-being and lifestyle market, have a promising brand, can be scaled up rapidly, is already in China or heading there, and have an interesting product with the potential to dominate its market.

Shareholders will be protected
The 2019 CBs will add 6.2% to its outstanding shares while the upsize option of SGD30m may add another 1.1%. However, its 2011 CBs actually did not dilute EPS much as OSIM repurchased 41m shares in 2011-13. These almost fully offset the 65m new shares issued when the 2011 CB holders converted. Management intends to repurchase shares in any market correction.

Steady as she goes
So far in 3Q14, sales growth has been steady. Its new sofa chair, uDiva, is being progressively rolled out in China, to steady sales. TWG is focusing on North Asian expansion, now that OSIM owns 88% of TWG North Asia, its JV with TWG. There will be greater international expansion of its franchise business for chairs and TWG Tea in 2H14 and FY15. Maintain BUY on the same TP, now on 20x FY15E fully-diluted P/E (previously 19x), in line with the higher valuations for its regional and global peers.