Brokers' Take

Osim International
Oct 27 close: $1.50

CIMB-GK RESEARCH, Oct 27

THIRD quarter net profit surpassed our forecast by 5 per cent and market expectations by 10 per cent. The robust topline growth was boosted by the consolidation of Global Active, which became a 67 per cent-owned subsidiary from 24 per cent-owned associate in May. Excluding GLA, Osim's revenue would have expanded 31 per cent y-o-y.

Upside surprise came from Osim's remarkable organic Ebitda margin improvement (we estimate three percentage points), thanks to new products and higher efficiency from the remodelling of stores. With 30 R&D, design, and quality control staff, Osim aims to launch three products every quarter.

Osim's 55 per cent subsidiary Brookstone offers an excellent distribution channel for massage chairs. The penetration rate for massage chairs is less than one per cent in the US (versus 7-8 per cent in Osim's key markets). Sales of several products marketed through Brookstone in the US have been very encouraging, prompting Osim to consider debuting a few new products in the US.

Our earnings forecasts have been raised slightly to factor in higher organic growth of 35 per cent for FY05 (previously 30 per cent), partially offset by lower assumptions for Brookstone's 3-month contributions (from 11 per cent to 9 per cent).

Osim's good results and greater clarity over Brookstone's growth strategies have increased our confidence in the group's execution of its US expansion. We are therefore assigning Osim a 15 per cent premium to the market's 12.5x CY06 P/E (previously no premium), which yields a new target price of $1.85.
OUTPERFORM

- Compiled by UMA SHANKARI