Brokers' Take

Osim International, April 21 close: $1.07

DBS VICKERS SECURITIES, April 20

OSIM'S latest deal to acquire Brookstone will transform the group into a global healthy lifestyle products powerhouse with significant revenue and cost synergies to be reaped.

We believe management made this move after having carefully considered the business fit and price, and a strategic plan to realise acquisition synergies.

We factored in a 9 to 15 per cent increment to our earnings forecast and raised our target price to $1.38. Maintain 'buy'.

Osim-led consortium makes offer for Brookstone Inc: Osim, together with consortium partners Temasek Capital and JC Child Associates, recently announced a takeover offer for Nasdaq-listed Brookstone Inc.

The deal values Brookstone's equity at US$456 million and would be financed by US$248 million of equity and US$205 million debt. Osim's contribution of US$90 million will give it an effective stake of 55 per cent in the company. This deal follows Osim's acquisition of Global Active, and has transformed Osim into a global player in the healthy lifestyle space with 991 outlets across more than 100 cities.

Three key positives - synergies, new markets and management continuity: This acquisition offers a platform for Osim to introduce its healthy lifestyle products and high-end massage chairs into the United States via Brookstone's 288-store retail network.

Synergies include the ability for Brookstone to leverage on Osim's Asian sourcing network, reducing middleman layers and improving gross margins. It would take more than 10 years for Osim to duplicate Brookstone's existing network organically, but the deal has opened up immediate access to the US market for Osim and expansion opportunities for Brookstone's innovative store concept to be exported to Asia. Supported by the highly experienced Brookstone management, we believe the odds of a successful post-merger performance are high.

Raising estimates and target price: Acquisition price paid for Brookstone based on 17-18x FY05 PE looks reasonable, considering the growth prospects, peer trading range, potential for synergies and a strong balance sheet.

Osim's net gearing would rise to 1x following the acquisition, but management expects to pare this down over five years. Osim's share of Brookstone's earnings would be equity-accounted. We are raising our forecast earnings by 9 per cent and 15 per cent for FY05 and FY06 respectively to factor in the boost to earnings from Brookstone. Maintain 'buy' with a raised target price of $1.38.
BUY

Compiled by JOYCE KOH