OSIM International (DMG)

OSIM International: Key takeaway from investor meeting with CFO (BUY, S$1.49, TP S$1.84)

Following the placement of the CBs which ignited investor anxiety over OSIM’s intentions for another huge M&A, we hosted a tea time investor meeting to gather more information from management. Key takeaways from our meeting with CFO Peter Lee: 1) OSIM does not intend to make mega acquisitions following the Brookstone saga; any acquisition will range between S$30-60m; 2) Year end cash war chest expected is expected to be ~S$250-300m; 3) RichLife, its proprietary nutritional brand in China, is expected to turn profitable next year. Maintain BUY with TP of S$1.84.

Not in hurry to acquire, any M&A to be in region of S$30-60m. CFO Peter Lee was quick to reassure investors that the Group was not intent on engaging in another big acquisition after learning a painful lesson from its Brookstone acquisition which was funded by a syndicate of ten banks. Any acquisition down the road will be in the region of S$30-60m. This amount is small relative to its cash hoard which we expect to be S$250m by year end. It was reiterated that any potential target will have to be a speciality retailer with a strong brand and current founders still running the business.

Flushed with cash, year end cash expected to be ~S$250-300m. In 1Q11, OSIM was sitting on net cash of S$30m. With CEO Ron Sim’s recent exercise of warrants, that will generate another S$26m in cash. To add to the cash pile, S$118m was raised from the CBs and S$76m is to be raised from the upcoming TDR listing, bringing total cash to S$250m. Coupled with strong net operating cashflows of ~S$25m, we expect OSIM to be flushed with cash. While the official dividend policy is 10-20%, we can expect it to trend towards 30%. In Q1, it had announced a payout of S$0.01 per share.

RichLife likely to be profitable next year. The Group’s nutritional supplements business in China which is under its own proprietary brand, RichLife is currently in losses but expected to be profitable by next year. Management plans to use a celebrity well-known in China to help market its range of products after experiencing tremendous success with superstar Andy Lau for its uDivine range of chairs.

Maintain BUY and TP of S$1.84. We think the recent sell down provides a window of opportunity for investors to accumulate the stock. Investor worries over another big leveraged buyout has been allayed now that management has clarified it will not be doing so. We like the stock as it: 1) Owns strong brands and dominant market positions in each of its businesses; 2) Expected to register strong earnings growth from its expansion into China; 3) Strong cash position ith ~S$250m cash at year end.