Money Talk: OSIM, SIIC Environment

Advertising and promotion spending allows OSIM to sell massage chairs for a 70 per cent gross margin while maintaining topline growth of 7 per cent per annum. -- PHOTO: OSIM
Advertising and promotion spending allows OSIM to sell massage chairs for a 70 per cent gross margin while maintaining topline growth of 7 per cent per annum. -- PHOTO: OSIM

SINGAPORE - Stay up to date on market chatter with our picks of the latest broker research reports, compiled by The Straits Times Money Desk.

1. OSIM

Broker: CIMB

We initiate coverage on OSIM with an Add rating and a $4.60 target price. We view OSIM as a brand company, and a great proxy for the growing affluent consumer class in Asia.

Advertising and promotion spending allows OSIM to sell massage chairs for a 70 per cent gross margin while maintaining topline growth of 7 per cent per annum. Our comparison studies show that its margins are not inferior to those of luxury brands in Europe.

Focusing on brand retail also means that minimal replacement capex is needed to sustain the business. Free cash flow (FCF) rises in tandem with net profit, with extra cash for investments, even after a 44 per cent FY2013 dividend payout.

No one saw the potential for a premium massage chair 25 years ago and few saw the potential for premium tea seven years ago. TWG, in which OSIM has a 70 per cent stake, is expected to define the luxury tea market in Asia. A successful tea business model differs from the Starbucks chain model in that it is a mix of food and beverage and wholesale. TWG seems to have hit the right formula.

2. SIIC Environment

Broker: OSK-DMG

SIIC Environment halted trading yesterday on the proposed placement of 1 billion shares at a placement price of $0.158, which is a discount of 7.6 per cent from its pre-halt close of $0.171.

The net proceeds totalled $154.78 million, and these will be used to finance SIIC's expansion of plants, enlarge its working capital, repay existing borrowings and for potential merger and acquisitions and greenfield project opportunities.

With the placement, net gearing will fall from 46 per cent as at end-Q1 FY2014 to about 19 per cent. Shares outstanding will increase from 8.59 billion to 9.59 billion shares.

The dilution on our projected earnings per share for FY2014 and FY2015 is 10.5 per cent and 10.3 per cent respectively. We derive a fair value of $0.188.