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What Investors Should Know About OSIM’s Latest Earnings

OSIM International Ltd. (SGX: O23) reported in its third-quarter earnings report yesterday. The reporting period was for 1 July 2014 to 30 September 2014. OSIM is a leading purveyor well-being and healthy lifestyle products, such as its namesake massage chairs and TWG Teas. You can read more about the company here.

Financial highlights

For the third quarter of 2014, OSIM’s revenue rose by 3.3% compared to the same quarter last year. Profits plunged 28% on a year-on-year comparison. The fall in profit was attributed to the increase in operating expenses.

Cash flow from operations dipped by 6% from $15.9 million a year ago to about $15 million in the past quarter. With capital expenditure of $9.5 million in the third quarter of 2014, OSIM managed to generate free cash flow of $5.5 million in the period.

The balance sheet remains solid, with $427 million in cash and equivalents together with approximately $190 million in debt and convertible bonds as of 30 September 2014. This gives a healthy net cash position of $237 million.

At the end of 2013, OSIM had approximately $267 million in cash and equivalents, with $156 million in debt and convertible bonds on its balance sheet. So, there was an improvement in the cash position compared to nine months ago. Individual investors should note that OSIM issued new convertible bonds worth $170 million on 28 August 2014.

Operational Highlights

The dip in revenue came amidst what OSIM sees as a “weaker environment”. Sales in South Asia was boosted by TWG Tea, however revenue from North Asia and the rest of the countries declined due to lower sales to Brookstone. The company also opened 9 OSIM outlets while closing 25 non-performing OSIM outlets in China. It ended the quarter with 565 OSIM outlets, 231 GNC/Richlife outlets and 37 TWG Tea outlets for a total outlet count of 833. This was lower compared to the 867 total outlets in the same quarter a year ago. It is notable that revenue is higher despite the reduction in outlet count.

Operating expenses increased due to startup and legal costs at TWG Tea together wage and rental increases. On the flipside, the company was also able to reduce interest expense through the issue of convertible bonds.

As mentioned, OSIM spent $9.5 million in capital expenditure for the third quarter of 2014. From this, $4.5 million went to opening new outlets, upgrading existing outlets, and expanding TWG Tea outlets to North Asia. Meanwhile the other $5 million was used to obtain office and warehouse space in Taiwan.

The board announced an interim dividend of 1 cent per share, which was unchanged from the prior year.

The management at OSIM added a commentary on the current quarter’s results:

“Following 22 consecutive quarters of record profit and with a strong balance sheet following the recent convertible bond issue, OSIM has embarked on a period of increased investment across the group especially at TWG Tea and OSIM.”

A quick look ahead

For the flagship OSIM brand, the company is focused on five key countries, namely China, Taiwan, Hong Kong, Singapore and Malaysia. China is OSIM’s number one market where it has 256 outlets in 45 cities.

On the TWG Tea side of business, it is increasing investments on supporting infrastructure such as central kitchens, offices and warehouses, as well as adding new employees. It is targeting 45 outlets by the end of the year, and has opened new outlets at Taiwan 101 and the Shanghai Grand Gateway.

Foolish Summary

At its closing price yesterday of $2.25, OSIM traded at around 16.5 times trailing earnings with a dividend yield of 2.7%.

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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 contributor Chin Hui Leong doesn’t own shares in any companies mentioned.