Fair Value –> S$1.80, currently trading at S$1.4650
Thesis
OSIM is a high margin business that is producing lifestyle products targeted at the increasing upper-middle income demographic. OSIM is currently expanding existing store footprint, while deploying cash that was raised via a bond offering in other strategic investments and share buy-backs. As the current cash hoard is used the business will return to previous RoE levels, which at ~50% beats the competition.
OSIM – Return on Equity
OSIM is focused on “enhancing total well-being” or retailing lifestyle brands, such as in-home massage products. The Company’s products include massage chairs, foot massagers, neck massagers, head massagers, fitness equipment, diagnostic equipment, vitamin & supplements (GNC Holdings in Singapore, Malaysia, Taiwan and Australia) and luxury tea (TWG Tea Co in Singapore).
Issues
In the middle of 2011 the company raised S$120m for acquisitions and working capital through issuing convertible bonds. This caused the price to drop off a cliff because 1) the issue was dilutive and 2) past acquisition experience wasn’t great with Brookstone not delivering to expectations. The convertible bonds are paying 2.75% interest semi-annually and can be redeemed until the 25th of June 2016 at S$2.025 per share. If all of the notes are exercised it would represent an 8% dilution to the existing equity holders. I can’t fathom why management wiped 8% of value out of the hands of the equity holders unless they had something up their sleeve that was going to be substantially value accretive and they had no other way to generate the cash.
Prior to the issuance the company was generating ~S$100m in operating cashflows and had negligible levels of debt. This was more than enough to cover the relatively small acquisitions made, which makes me seriously question why this issuance was necessary but for the obvious fact that there was an overzealous banker sitting in the background. Over the past 2 years OSIM has been buying back shares with the excess cash.
All 9 analysts who cover the stock are currently rating it as a buy, limiting the potential for further marginal buyers.
Margins
The company only reports segment information for the retail and distribution businesses, this doesn’t provide a lot of insight into the operations of the subsidiaries. However, the overall EBITDA margin was 21.4%, ranking up there with the other international luxury brands (see the table below) and has been improving each year, with the exception being the year following the acquisition of Brookstone.
The improvement in the EBITDA margin has been driven through mix changes and cost reductions. It’s difficult to tell how much improvement has come from better sourcing and improvements because of limited transparency in the segmental reporting. Regardless, the GP margin has improved from 57.8% in 2005 to 68.9% in 2011 and appear that it has more room for improvement now OSIM is achieving economies of scale.
OSIM – EBITDA Margin
Key Shareholders
There are some high profile names on the OSIM register, including; Franklin Templeton, Blackrock, and Fidelity among others.
OSIM – Shareholders
The Founder and Chairman, Ron Sim, was named Best CEO in the mid-cap category at the Singapore Corporate Awards in July this year (2012). COO, Teo Chay Lee, has been with OSIM for over 20 years now and is responsible for Malaysia, Thailand, Indonesian and Singaporean operations.
Valuation
Currently 5% of households in Singapore and Hong Kong own massage chairs compared with 30% in Japan. There is a lot of room for OSIM to grow its flagship brand in the current markets, when combined with the potential of the other brands currently in the OSIM stable it looks like there is a lot of potential for OSIM as a whole as long as it doesn’t bite off more than it can chew.
The global peers trade at 11x EBITDA but don’t produce the same amount of FCF that OSIM does at the moment because of the under ambitious current capital structure. Not only is there room for OSIM to grow earnings from its current platform but there’s also potential for a rerating if capital initiatives are executed effectively. It would be preferred if OSIM management stuck to their knitting and focused on growing the existing stable of brands, without the help of zealots encouraging flights of fancy into unknown realms.
The potential for ~20% upside from current prices, with stable and growing streams of FCF mean that OSIM will make the cut it into the Singapore portion of the portfolio. On a relative multiple basis, lacking any near-term catalysts, I’d value OSIM at S$1.80.
OSIM – Valuation
As at writing I have a position in OSIM and may make other transactions within the next 30 days. If you’re considering investing, please do your own due diligence.
