Since the start of 2010, Osim International Ltd (SGX: O23) has been a great market-beater with its shares growing by more than 320% in price to S$2.26 today. Its performance has been significantly better than that of the Straits Times Index (SGX: ^STI), Singapore’s market bellwether. Over the same span of time, the STI has grown by barely 10%. A massive winner Can Osim continue being such an impressive market beater going forward? A large part of the answer to the question hinges on the company’s valuation, keeping in mind the idea that shares with lower valuations are generally preferred…
Since the start of 2010, Osim International Ltd (SGX: O23) has been a great market-beater with its shares growing by more than 320% in price to S$2.26 today. Its performance has been significantly better than that of the Straits Times Index (SGX: ^STI), Singapore’s market bellwether. Over the same span of time, the STI has grown by barely 10%.
A massive winner
Can Osim continue being such an impressive market beater going forward? A large part of the answer to the question hinges on the company’s valuation, keeping in mind the idea that shares with lower valuations are generally preferred to ones with higher valuations.
Source: S&P Capital IQ
At Osim’s current price of S$2.26, it is valued at 15 times its trailing earnings. This compares favourably against its average PE ratio of 17 since January 2010, as seen from the chart above (the chart plots Osim’s PE ratio from 27 January 2010 till today). In addition, Osim’s current PE ratio is also not too far off from that of the SPDR STI ETF (SGX: ES3), a proxy for the Straits Times Index; the SPDR STI ETF carries a PE ratio of 13.
These suggest Osim might not actually be that expensive. But, looking at the PE ratio of a company without context regarding its future growth can’t give us the full picture. As investor Ric Dillon once said:
“On the behavioural-finance side, one of many inefficiencies comes from people anchoring on the past. People assume something is cheap, say, just because it hasn’t traded at such a low valuation for five or ten years. But that doesn’t matter, what matters is what will be [emphasis mine].”
What Dillon meant is that a share which looks cheap historically in relation to its own historical standards (or in relation to other shares) need not actually be cheap if its corporate future does not warrant any optimism.
Driving growth with luxury
Fortunately with Osim, there’s some genuine cause for a bright outlook. The company is a purveyor of lifestyle and wellness products through its retail brands OSIM (massage chairs), Richlife/GNC (nutritional supplements), and TWG Tea (luxury tea).
TWG Tea is still a tiny portion of Osim’s business, accounting for roughly 5% to 15% of Osim’s total revenue. But, the people behind TWG Tea have big ambitions for it. According to my colleague Chin Hui Leong, “Taha Bouqdib, President for TWG Tea, [had] set his sights [back in 2012] on achieving $1 billion in revenue for the brand over the next ten years.”
With Osim’s revenue of S$687 million over the last 12 months and its 70% stake in TWG Tea, there’s some significant upside for the company if the luxury tea brand manages to hit its lofty goals.
As of the second quarter of 2014, TWG Tea had only 33 outlets worldwide, so that small store base gives promise that there really is more significant room for growth; for some perspective (although it’s definitely not an apple-to-apple comparison), Starbucks is running 4,425 stores in the Asia-Pacific region today.
The other parts of Osim’s business have also been progressing well, judging from the steady growth in its business in every quarter (see the chart below) going back to at least the start of 2010.
Source: S&P Capital IQ
There’s also an interesting statistic which can point toward more room for growth for Osim’s largest business segment – its OSIM brand of massage chairs (OSIM retail stores take up almost 70% of the entire company’s store count).
According to analyst reports, wealthy Asian countries like Japan see more than 20% of households owning a massage chair at home. In Osim’s key markets – Singapore, Hong Kong, Malaysia, Taiwan, and China – the penetration rates range between 1% (in China) and 10% (in Singapore and Hong Kong). If Japan is taken to be the norm – or at least the upper limits of where massage chair penetration rates can be in Asia – then there might be plenty of headroom for Osim to grow into.
Foolish Bottom Line
There are certainly things to like about Osim’s future. But, the company’s not without its risks.
For one, it has had a history of poor acquisitions. Osim acquired a majority stake in U.S.-based retailer Brookstone in 2005 (valuing the entire US firm at US$445 million), only to make a complete write-off of its investment in 2009 after the retailer suffered serious losses in the intervening years. Buying a stake in TWG Tea has so far been a success, but it would pay for investors to watch Osim’s future acquisitions.
Massage chairs are also big-ticket items (costing more than a few thousand dollars each at the higher price points) and thus could be considered discretionary consumer items. This could leave the company vulnerable to an economic downturn. During the Great Financial Crisis of 2007-09, Osim saw its top-line decline by a fair bit; revenue dropped from S$627 million in 2006 to S$529 million in 2007 before falling to S$460 million in the following year.
All told, investors would have to weigh the risks and rewards associated with Osim in order to make an informed investing decision.
At the very least though, the company’s historically-low and market-matching PE ratio could it make a worthwhile target for further study.
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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore writer Chong Ser Jing owns shares in Starbucks.