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Analysts: OSIM’s Slow 1Q15 To Continue Through 2015
Aspire, Hot Picks | 21 May 2015
By: Lim Si Jie
Articles (169) Profile

Analysts' updates on OSIM International as at 21/05/2015

OSIM International’s recent 1Q15 results were disappointing to most analysts as sales were a lot weaker than expected. According to the common consensus, the major factor in its poor performance was the recent lack of blockbuster products. However, in the longer term, analysts continue to be positive, especially with the replacement cycle due in 2017.

Bottom Line Held Back

OSIM reported 1Q15 net profit of $13.5 million, down 53 percent Year-on-Year (YoY). It fell short of market expectations fulfilling only 12 percent of full year estimates consensus. Bottom-line performance continued to be dragged by start-up and legal costs from TWG Tea, higher wages and rental costs.

1Q15 revenue of $150 million also disappointed terribly. 1Q15 was a challenging quarter for OSIM where retail sales across its five core countries were soft.

Lack Of Blockbuster Product

The main reason for a poor 1Q performance was the lack of recent blockbuster products. The typical business model of OSIM is to drive excitement and demand for a new blockbuster product every few years. The muted top-line was due to the absence of a major flagship chair launch this year, which would have been a growth driver.

Even though management sees the drop in business as temporary, analysts are not so optimistic, especially with the seeming lack of a blockbuster product in the pipeline.

Despite the lacklustre results, OSIM’s balance sheet remains conservative and was in a net cash position of $256 million. The total of net cash and fixed income investments was $292 million, including fixed income investments of $36 million. OSIM had thus declared an interim dividend of one cent per share.

Potential Blockbuster Product

OSIM unveiled its potential blockbuster product, the new uMagic massage chair ($5,000), which runs on improved massage technology. The new uMagic massage chair was launched in April 2015 and is expected to drive sales. It was launched in only four of OSIM’s core markets, excluding China.

Analysts are looking forward to 2Q15 for signs of validation that the new chair is able to drive growth for this year.

The China launch of uMagic is stipulated to be in June 2015. And with other smaller products in the region slated from June 2015 onwards, analysts believe 2H15 could present a better outlook as OSIM’s products are also targeted at a more resilient and affluent market.

However, in view of the poor 1Q15 results, analysts feel that the current sales deficit is too much for the sales of uMagic alone to prevent a FY15 YoY profit drop.

Looking forward, sales volume could build up rapidly when its three to five-year replacement cycle is due, i.e. the point when starter-buyers begin to upgrade their existing massage chairs to newer models. However, analysts seem to worry that this may not be realised until 2017. Until then, OSIM will be exposed to macro conditions and consumer acceptance of its new products.

Long Term Outlook

OSIM has embarked on preparations for its next leap forward, i.e. its next big Merger and Acquisition (M&A). Having grown non-stop for the past six years, OSIM will be focusing on its core chair business, TWG and an upcoming business not yet made known to the public.

In the past three years, OSIM has consistently mopped up shares (buybacks) at below $2 and could continue doing so at current price levels. Analysts note that OSIM’s CEO Ron Sim is still “happy to buy back” shares that he believes are undervalued.

Si Jie is no stranger to investing having started his journey at a young age. He is heavily influenced by acclaimed investors such as Benjamin Graham, Peter Lynch, and John Rothchild.

Please click here for more information about this author.

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