The Straits Times / The Business Times News on OSIM

Brookstone boosts Osim profit but jacks up gearing

Analysts upbeat on prospects of healthcare group entering US market

THE acquisition of Brookstone Inc will jack up the gearing of healthcare group Osim but will also give earnings a boost, analysts said.

Osim's net gearing will rise from 5 per cent to 90 per cent after completing its acquisition of Brookstone on Oct 4, Citigroup analysts said in a report.

Nevertheless, the US investment bank expects Osim's margins to remain healthy.

The acquisition of Brookstone Inc will jack up the gearing of healthcare group Osim but will also give earnings a boost.

Earlier in April, Osim led a consortium to stage a US$456 million acquisition of Brookstone, a nationwide product development and specialty retailer in the United States.

In a report dated Oct 6, Citigroup pointed out that with the acquisition completed, 'Osim now has exposure to the large homogenous US market with a nationwide network of 291 outlets across 41 states, District of Columbia and Puerto Rico'.

Accordingly, the authors also raised their earnings forecast for Osim by 4 per cent, 12.9 per cent and 20.3 per cent for FY05, FY06, FY07 respectively.

This is based on the assumption that Brookstone will enjoy margin expansion going forward (40 per cent FY05, 41 per cent FY06, 42 per cent FY07), which they feel is realistic, 'considering that Osim's gross margins (five-year average of 61 per cent) are significantly higher than Brookstone (five-year average of 38 per cent)'.

In addition, they also raised their 12-month target price for Osim shares to $1.71 from $1.58 previously, and issued a 'buy' on the stock.

At CLSA Asia-Pacific, analysts are similarly upbeat about Osim's prospects. The strong momentum of new product launches with higher margins should also offset the greater revenue contribution from its franchise operations where the margins are lower, reckoned the CLSA analysts.

Furthermore, they also pointed to Osim's plans to raise its original-design-manufacturing (ODM) product mix to 80 per cent in the coming years and a turnaround in subsidiary Global Active's operations in the next few quarters to justify an upward revision of net margins to 9.6 per cent in FY06. Osim's current ODM product mix is about 60 per cent.

North Asia contributed 63 per cent of Osim's first-half turnover of $221.3 million turnover and 'looks set to deliver 18 per cent CAGR (compounded annual growth rate) through FY07', CLSA also said.

Still, Citigroup analysts expressed some concerns about the spike in Osim's net gearing as a result of its US acquisition.

To finance the deal, Osim raised US$90 million to fund part of the US$248 million equity portion of the transaction, leading to a jump in net gearing. However, Citigroup expects the group to pay down the debt progressively through the years from its healthy cash flows, taking net gearing down to a more acceptable 33 per cent by FY07.

Likewise, high fuel prices may also be a dampener on consumer spending in the US, given that 'every penny increase per gallon of gasoline is equivalent to about US$1 billion more of annual spending, where consumers have to fund more of their transportation and heating needs rather than a broader assortment of goods', the analysts said.

'Thus, the impact of sustained high gasoline prices following the two recent hurricanes is a risk,' they concluded.

For the six months ended July 30, Brookstone booked sales of US$164.3 million and a net loss of US$12.5 million. As a result of the weaker-than-expected financial performance, the acquisition price was revised to US$20 per share, down from US$20.50 previously.