• 3Q14 PATMI dipped 27.8% YoY
• Interim DPS of 1 S cent
• Cut forecasts, FV and downgrade to HOLD

3Q14 results below our expectations

OSIM International Ltd (OSIM) announced a set of disappointing 3Q14 results which fell short of ours and the street’s expectations. Revenue grew 3.4% YoY to S$158.2m despite lower sales to Brookstone following a change in ownership. What caught us by surprise was the 27.8% YoY tumble in PATMI to S$16.4m. Management attributed this to the general market weakness, including China and Hong Kong, coupled with higher start-up expenses and legal costs from TWGTea’s expansion. Development costs had to be incurred on supporting infrastructure such as central kitchens, offices, warehouses and the training of staff as it opens TWG-Tea stores in new areas. For 9M14, revenue and PATMI of S$513.5m and S$74.8m represented growth of 9.5% and 1.1%, but only formed 70.0% and 63.4% of our FY14 forecasts, respectively. An interim DPS of 1 S cent was declared, similar to 3Q13.

Near-term cost pressures may persist

Looking ahead, as OSIM will likely continue its aggressive expansion plans for TWG-Tea, we expect cost pressures to remain in the foreseeable future, although we are still optimistic on its medium-to-long-term contribution to OSIM’s bottomline. China will be a key area of focus given its immense consumer market. Management intends to open two stores in Shanghai and one in Guangzhou in 4Q14. It will also add at least one outlet in Beijing in 1H15. Meanwhile, with regards to its core OSIM business, management has plans to launch a new flagship massage chair in 1H15.

Lack of near-term catalysts; downgrade to HOLD

We slash our FY14 and FY15 revenue/PATMI forecasts by 5.7%/15.4% and 10.0%/19.9%, respectively, following this poor set of results. Given the headwinds facing the group, we also apply a lower PER target peg of 14x (approximately equivalent to its 5-year average forward PER), from 20x previously. Rolling forward our valuations to FY15F EPS, our fair value drops from S$3.21 to S$1.90. Although OSIM’s share price has plunged 18.0% since it reported its results, we believe the weak sentiment and lack of near-term catalysts may cap its upside potential. Hence, we downgrade OSIM to HOLD.

Source: OCBC Research - 31 Oct 2014