• Challenging retail scene
• Lack of catalyst in near term
• Interim DPS of 2 S-cents kept

FY15 was a tough year

OSIM International Ltd (OSIM) ended the year with another weak quarter. 4Q15 revenue was down 5% YoY to S$168.7m, while PATMI fell 66.6% to S$9.3m. On a full-year basis, FY15 revenue was 10.4% lower at S$619.6m and PATMI decreased 49.6% to S$51.5m.

OSIM declared an interim dividend of 2 S-cents/share, thus maintaining a full year DPS of 6 Scents/share, similar to last year. The company is in a net cash position of S$211m, which should support DPS of 6 S-cents/share going forward, as well as allow for continued share buybacks. No further insights were given on potential utilization of the cash pile.

Cloudy earnings visibility

Estimated PATMI for FY15 could have been about S$67.2m, as the group recorded an aggregate S$15.7m of one-off losses from ONI Global’s exit of Australia market as well as legal fees. Notwithstanding this, we note the stark decline in profitability and believe earnings visibility remains clouded.

While China is progressively transforming into a consumption driven economy, it has been difficult for the company to ride on this trend. We understand that Singapore and Malaysia are the weaker performing markets as well.

On a net-net basis, 27 underperforming OSIM outlets were closed during the year. Given the soft outlook in the retail environment of most markets and the company’s underwhelming performance so far, while we can expect the launch of a new massage chair possibly in mid- 16, we are less compelled to consider new product launches as substantial growth drivers.

In addition, the group expects to open another 15-20 TWG Tea stores this year, incurring gestation costs in the process.

Taking a prudent stance

Despite the cheaper valuations at current price level, we prefer to take a cautious stance. While we acknowledge the potential rewards in the longer term, given the uncertain outlook in the near to medium term, we reduce our target peg from 14x to 12x FY16F EPS, which is about 1s.d. below its five-year historical average. We derive a new FV estimate of S$0.82, versus S$1.49 previously, and downgrade our rating from hold to SELL.

Source: OCBC Research - 29 Jan 2016