• Competent execution capabilities
• uDiva its new flagship product
• Strong balance sheet

Building a strong brand equity

OSIM International Ltd (OSIM) has grown from strength to strength over the past several years, establishing a strong brands portfolio and delivering solid operational performance via management’s competent execution capabilities. Its PATMI increase of 22% during its last 4Q13 results meant that it has now achieved 20 consecutive quarters of YoY earnings growth, which is a remarkable feat amid the uncertain macroeconomic backdrop. From FY09 to FY13, OSIM’s PATMI recorded a stellar CAGR of 44.4%.

Constantly rolling out innovative products

OSIM’s success story has been driven by its ability to constantly introduce cutting-edge innovative new products to the market. Its latest flagship product is the OSIM uDiva, a triple enjoyment sofa-lounger-massager which is compact in size and equipped with a 3D Power-Ball massage technology. Retailing at an introductory price of S$2,588, it is endorsed by popular Korean actor Lee Min Ho. OSIM spends approximately 6-7% of its sales on advertising and promotion activities, with a key strategy on engaging renowned celebrities in Asia.

Robust financial position

We expect the full conversion of OSIM’s convertible bonds (CBs) to occur before 5 Jul this year, the date which OSIM is able to recall the CBs. OSIM’s last closing share price of S$2.90 is significantly above the conversion price of S$1.87. Assuming full conversion, we estimate this would propel OSIM into a solid net cash position of S$300.8m (S$0.38 per share), giving it the ammunition to drive future M&A activities which we expect to be EPS accretive in nature. We raise our FY14 /FY15 PATMI projections by 1.5%/1.9%, but trim our EPS forecasts by 6.8%/6.4% to account for the dilution. Nevertheless, given OSIM’s strengthened balance sheet and investment merits as elaborated earlier, we believe it deserves to command a higher PER target peg of 20x (previously 18x). Applying this to our blended FY14/15F EPS forecasts, we raise our fair value estimate from S$2.90 to S$3.18. Maintain BUY. Key risks to our estimates include a slowdown in macroeconomic growth and launch of imitation products by competitors.

Source: OCBC Research - 5 May 2014