Brokers' Take

Merrill's call on Osim: 'Buy'

Target price set at $2 on retailer's potental US market penetration

MERRILL Lynch has initiated coverage of Osim, the retailer of healthy-lifestyle products, with a 'buy' call and a target price of $2 a share on back of its potential to penetrate the US market using Brookstone.

'Thanks to its recent acquisition of Brookstone, Osim has an immediate channel to sell to higher-income US consumers via Brookstone's network of 292 retail stores,' Merrill said in its Nov 4 report when Osim was trading around $1.58 a share.

By yesterday, the shares had risen to trade around $1.67 each.

Merrill is forecasting a 25 per cent earnings compound annual growth rate for Osim from FY05-08, driven by strong organic growth from core Asian operations, and contribution from its newly acquired US associate, Brookstone, a specialty retailer of high-end gift items in the US.

'We believe there is high potential as the US consumer market is underpenetrated. Only 1.3 per cent of US households have purchased massage chairs, versus 30 per cent in Japan. We believe this figure will rise with greater awareness of wellness in the US,' Merrill said.

Osim's US penetration is still limited with nine stores in California. Brookstone offers a limited selection of Osim products - the iSymphonic massage chair and iSqueez calf massager - in its health and fitness section.

Merger synergies should kick in from 2007 as Osim pushes its health products through Brookstone's US distribution network and drives down Brookstone's sourcing costs by helping it to switch to lower-cost Asian suppliers.

Merrill expects Brookstone to boost Osim's net profit by around 19 per cent between FY05 and FY08. It said Brookstone's FY05 contribution will be abnormally high as Osim is only equity accounting for Brookstone's profitable December quarter, omitting the seasonally loss-making first three quarters. This will normalise in the next financial year as Osim starts to account for Brookstone's full-year financials.

The US research house said Osim is Asia's dominant player in the healthy-lifestyle product segment, with 578 stores and franchise outlets in Hong Kong, China, Taiwan, Singapore and Malaysia.

Although best known for its massage chairs (which currently account for 50 per cent of group sales), Osim's newer products like the handheld massagers, calf massagers are gaining a place in the market.

Osim's net income is forecast at $46.5 million for FY05 and $58.4 million for FY06, up from $31.7 million in FY04.