OSIM International (DMG)

OSIM International: Building a warchest for another M&A? (BUY, S$1.54, TP S$1.84)

OSIM announced that it has placed out S$120m convertible bonds to institutional investors at a conversion price of S$2.03, a 25% premium over last closing price of S$1.62. Potential dilution from full conversion of these CBs would be 8%. Net proceeds of S$118.3m will be earmarked for “potential value-added acquisitions.” Market has not taken news of the CB well and its share price has dived 5%. Its TDR listing has been approved which will see it raise S$76m. With healthy net operating cashflows of ~S$25m per quarter, it appears that OSIM is building a war chest for another M&A. We spoke to CFO Peter Lee and he stressed that “nothing specific has been identified at the moment.” We doubt OSIM would get into another Brookstone situation and its recent acquisition of a 35% stake in TWG for S$31.4m has been relatively minor in comparison to its cash hoard. We maintain our BUY call and TP of S$1.84, pegged to 18x FY11F earnings.

S$118.3m from CBs, potential 8% EPS dilution. The S$120m unsecured convertible bonds due 2016 were fully placed with institutional investors. Conversion price is set at S$2.025 per share, a 25% premium against last closing of S$1.62 on 7 June 2011 and will bear interest of 2.75% per annum, payable semi-annually. If fully converted, a total of 59.3m new ordinary shares will be issued hence we are looking at a potential 8% EPS dilution. If that happens, our TP would be reduced accordingly to S$1.70. Management has said that the proceeds will be used to “enhance general working capital” and “to finance potential value-added acquisitions.”

Criteria for “potential” acquisitions. We spoke to CFO Peter Lee and he says that “nothing specific has been identified at the moment.” He stressed that the Group has a strict set of criteria for any potential targets and will only consider speciality retailers in the well being/healthy lifestyle arena. They would have to be earnings accretive and have a strong brand name to which OSIM can strategically add value to. This is shown in its recent acquisition of a 35% stake in luxury tea retailer TWG for S$31.4m.

Maintain BUY. Stock price has fallen 5% following the news of the CB. We think the selloff is overdone as the CBs are currently not in the money and OSIM is unlikely to make another huge risky leveraged buyout after having learnt a painful lesson from its Brookstone acquisition. We like OSIM as it is a speciality retailer with a strong stable of brands and dominant market position in each of its businesses. Reiterate BUY with TP of S$1.84, pegged to 18x FY11F earnings.