OSIM's  3Q14  results  were  a  big  miss,  as  earnings  fell  27.8%  YoY  to SGD16.4m, partly dragged down by legal costs.  Its  9M14 net profit now makes  up  63%  of  consensus  FY14  net  profit  and  it  is  not  likely  to achieve  earlier  forecasts.  We  are  confident  the  business  remains fundamentally sound, but are cognizant that  the operating environment is  weak.  We  keep  our  BUY  rating,  with  a  lower  TP  of  SGD2.75  (from SGD3.85) derived from a 16.5x FY15F P/E, 22.2% upside. 

Overall sales were weak.  OSIM International's (OSIM) 3Q14 revenue rose  3%  YoY  to  SGD158.2m,  but  this  was  due  to  the consolidation  of TWG.  We  estimate  revenue  of  its  other  businesses  were  down  by around  5-10%  YoY,  with  the  decline  being  broad-based  in  nature.Discretionary  retailers  are  experiencing  weak  demand  in  key  markets like  China,  Hong  Kong,  Singapore and  Malaysia .  The lack  of  any  new products  that are major hits  in  recent quarters was also a factor,  in our view.  

One-off legal fees and start-up costs at TWG dragged down profit. Its  profit  before  tax  declined  by  SGD6.7m.  Management  cited  one-off legal fees for its ongoing trade infringement appeal cas e in Hong Kong.Although the sum was not disclosed, we estimate it to be  SGD3m-4m. Start-up  expenses  at  TWG  were  another  factor  behind  the  decline  as well. This year, TWG set up new central kitchens and expanded  its total staff in anticipation of store openings in Taiwan a nd Shanghai.

We  believe  its  business  remains  sound  but  the  environment  is weak. We think OSIM's cash  flow is a good indicator of the health of itsbusiness. YTD, it generated SGD69.8m in operating cash flow - which is only marginally behind  that of  the same period last year.  On a positive note,  the  poor  environment  may  weed  out  weaker  retailers  and  allow OSIM to secure advatageous retail space for its next leg of growth. 

A road-bump;  we keep our BUY recommendation.  With the earnings disappointment, we now  use a lower 16.5x FY15F P/E  (previously 20x) to value the stock, in line with its retail peers. OSIM still has a very strong balance sheet and a net cash position of SGD237m. Our TP of SGD2.75 also factors in net cash/share of SGD0.30.

Source: OSK-DMG