OSIM International Ltd - Why build a war chest when there is no acquisition forthcoming?

24/10/2014 – OSIM International Ltd had no explanation for 9.8% decline in share price between October 7 and October 8, when it was queried by the surveillance department of the Singapore Exchange.

It clarified that there are currently no ongoing discussions regarding any joint ventures, mergers, acquisitions or purchases or sales of any significant assets.

Its trading volume jumped from 1.9 mln on October 3 to 3.2 mln on October 7 and 8.4 mln on October 8.

On September 18, OSIM completed the proposed issue of S$170 mln zero-coupon unsecured convertible bonds due on September 18, 2019.

The bonds have an initial conversion price of S$3.525 per new share, which represents a 25% premium over its closing price of S$2.82 prior to the announcement.

However, since then its share price has fallen about 17% to S$2.36 because it didn’t say where it was going to invest one-third of the proceeds, earmarked for acquisitions.

It announces earnings on October 28.

CIMB Research has maintained an ADD rating with target price lowered to S$4.29 to factor in dilution from convertible bonds.

It believes OSIM’s current valuation of 15 times price-to-earnings multiple of calendar year 2015 is not stretched compared to other brand owners.

Maybank Research continues to forecast average 19% earnings growth for FY14 to FY16.

Hence, it maintained BUY rating with a target price of S$3.50.

The analyst says sales growth in Q3 FY14 has been steady while its new sofa chair, uDiva, is being progressively rolled out in China, to steady sales.

TWG is focusing on North Asian expansion, now that OSIM owns 88% of TWG North Asia, its JV with TWG.

There will be greater international expansion of its franchise business for chairs and TWG Tea in H2 FY14 and FY15.

Investor Central. Asian insights for global investors. We ask the tough questions of Asian companies which global investors need answers to.

Question

1. Why build a war chest when there is no acquisition forthcoming?

OSIM has a strong financial position, with a net cash balance of S$238.5 mln as at June 2014.

It will use 35% of the net proceeds to enhance its well-being and lifestyle business in Asia and beyond, 35% to finance acquisitions and 30% for working capital purposes.

Maybank Research says OSIM may not have a specific target for acquisitions but it is very clear what kind of companies it wants to buy.

They must be positioned at the mid-to-upper end of the well-being and lifestyle market, have a promising brand, can be scaled up rapidly, and is already in China or heading there.

Question

2. Which companies is OSIM eyeing?

According to CIMB Research, OSIM highlighted that its two closest competitors have recently been sold, suggesting that their previous owners found it difficult to compete with OSIM.

Last year in September 2013, Ogawa was sold to Xiamen Comfort Science & Technology Group Co.

Ogawa’s last full-year profit was RM14.4 mln in FY13.

This year, OTO’s major shareholder also disposed of its shares to new shareholders.

OTO’s last full-year profit was HK$8.7 mln.

(Read the full story to get all 5 questions)

We have invited the company to an on-camera interview, and/or to reply to our questions in writing.

At the time of publication we have not received a reply (which is why you are seeing this message).

We will update this report if we do.

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