The Straits Times / The Business Times News on OSIM

OSIM has a mountain of doubt to climb

CHINESE actress Shu Qi - who launched OSIM's latest massage chair - starred recently in the film Confession of Pain. The movie title is just as apt a description for the shock profit warning delivered by the Singapore company this week.

Sitting pretty: While Shu Qi's recent movie got mixed reviews, OSIM's profit warning got the thumbs down from the market

And while the movie garnered mixed reviews - some critics regarded it as the best Hong Kong production of 2006 while others called it watchable but forgettable - the stock market was rather more unforgiving of OSIM. In the wake of the profit warning, OSIM shares collapsed 20 per cent to $1.05 yesterday, its lowest level in one-and-a-half years.

In a statement to the Singapore Exchange on Wednesday, OSIM had warned that its after-tax profit for the financial year ended December 2006 will be 20-28 per cent lower than the $46.7 million achieved in 2005.

The company, a maker of healthy lifestyle products, gave two reasons: hefty interest expenses resulting from its acquisition of US retail group Brookstone, and negative publicity arising from unsubstantiated product claims by other industry players, which hurt sales in the fourth quarter of FY2006.

The two factors, however, are not new. Even before the latest development, OSIM's results in recent quarters contained enough to raise a red flag.

Where the problem really lies is the level of optimism projected by OSIM's management, and the fact that the market, as a whole, wanted to believe in OSIM, given its long track record of delivering earnings and share price growth.

As early as the first quarter of last year, there were indications that OSIM's earnings could be entering a period of volatility. Its net profit for Q1 '06 fell 94 per cent to just $0.5 million, due to financing costs and lower revenue from Brookstone, which it acquired in 2005 to expand outside Asia.

OSIM, however, said at the time that its core operations were performing well, and maintained its guidance for revenue and earnings growth of 20-30 per cent for FY06. It also said it was trying to make Brookstone profitable from Q2 '06 onwards.

More bad news followed, however. In Q3 '06, OSIM swung to a net loss of $9.8 million from a profit of $10.4 million a year ago, dragged down not just by Brookstone but also by the impact of 'copycat products' in China.

It was the company's first quarterly net loss since listing six years ago. Still, OSIM maintained its guidance and said it expects revenue and net profit for FY06 to exceed that of FY05. It also called the poor Q3 performance 'a blip', and said the impact of the negative publicity caused by the copycat products would fizzle out by Q4. As it turned out, OSIM's guidance was overly optimistic, and the market was flat-footed.

Analysts' reactions hint at a deep disappointment with the company and management. 'The lack of comment from OSIM management in the last two months has blown into a surprise profit warning last night,' said Credit Suisse in a report yesterday. It said the profit warning was 'too little, too late' and downgraded the stock to 'neutral'.

OCBC Investment Research called it an 'earnings bombshell' and cut its rating on OSIM to 'sell'. Citigroup slashed its FY06-FY08 earnings forecast for OSIM by 36-40 per cent, and reiterated its 'sell' call.

Even now, OSIM is maintaining that its 'directors are optimistic of the group's performance in 2007 and believe that the short-term underperformance will progressively correct itself during the current year'. It said FY07 earnings would be higher than that in FY06.

OSIM also reiterated its strategy: improve the quarterly performance of Brookstone; launch new products; capitalise on the profit growth momentum of its nutrition products subsidiary Global Active; open new stores; and expand its franchise further.

But it's all wearing a little thin. The market - which was prepared to give OSIM the benefit of the doubt a year ago - is probably in no mood to take all this at face value. For investors and analysts going forward, the proof is in the pudding.

More than just earnings, OSIM has lost credibility with the market - its guidance no longer inspires confidence. OSIM now has a mountain of doubt to climb.