OSIM’s net cash holdings look set to swell to SGD300m this year as convertible bond holders exercise their option before July before OSIM recalls the bonds.

This war chest will empower OSIM to acquire and incubate more new brands and generate cash. ONI (GNC) and TWG have proven to be astute buys despite market scepticism.

Reiterate BUY with a new Street-high TP of SGD3.45. 1Q14 results to be announced on 6 May.

Sit back and watch the cash roll in

OSIM is now a highly established brand in its key markets. It is a capex-light business as most of the heavy lifting has been done in prior years in terms of store count expansion. By year-end, we estimate the company will be sitting on net cash of almost SGD300m and generating free cash flow in excess of SGD100m. Much is remembered of OSIM’s unsuccessful SGD144m acquisition of a majority stake in US-based retailer Brookstone, but the market was initially sceptical when it invested just SGD118m in ONI (GNC) – SGD53m and TWG – SGD65, which have turned out to be great contributors. We expect management to be on the lookout to add another valuable brand to its outstanding portfolio.

1Q14 results preview

With TWG’s maiden consolidation, we expect OSIM to report revenue growth of 16% YoY in 1Q14 despite muted consumer sentiment in Singapore and Malaysia. We also expect net profit to grow 15% YoY to SGD28.9m and are keeping our forecasts intact for now. OSIM is currently in a lawsuit against TWG minority shareholders, but we believe this will not derail growth plans. With its net cash pile having grown substantially, we believe it is fair to account for that separately, after subscribing a 20x FY14E ex-cash P/E valuation. This takes our TP up to SGD3.45 (previously SGD2.78).

Source: Maybank Kim Eng Research - 23 Apr 2014