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3 Wise Views on OSIM International Ltd

Three wise men were blindfolded and led one at a time into a room where an elephant stood. Each was asked to discern what was in the room without removing his blindfold.

The first, upon touching the elephant’s trunk, concluded a “snake” was in the room. The second, upon contacting a leg, concluded a “tree” was in the room. The third, upon grasping the tail, concluded a “rope” was in the room. All were surprised to discover the elephant once their blindfolds were removed.

— old Indian fable

You may have heard this old fable before. The three blindfolded wise men were not able to make a good guess of the complete picture (in this case, an elephant). It can be the same with investing.

For any potential investment, our own view may be limited, and we may miss some major points. We could always do with more intelligent and Foolish perspectives.

To demonstrate, let’s use lifestyle products retailer OSIM International Ltd (SGX: O23) as an example. The company’s primary products would be its namesake massage chairs. Beyond that, Osim also has stakes in luxury tea retailer TWG Tea and the Richlife/GNC franchise, which sells nutritional supplements.

You can read more about the company in here.

With Osim, I would like to share three possible views, from three differing investor personalities no less. They are the value investor, the income investor, and the growth investor.

The value investor’s view

At its closing price of $1.61 last Friday, Osim sported a trailing price to earnings (PE) ratio of around 14.3.

Meanwhile, the SPDR STI ETF has a trailing PE ratio of 13.4. If we take the SPDR STI ETF as a proxy for Singapore’s market barometer, the Straits Times Index (SGX: ^STI) – which is the case, since the former closely mimics the fundamentals of the latter – we can then say that stocks in Singapore are also selling for 13.4 times their trailing earnings on average.

In this case, Osim’s PE ratio may be slightly higher than where the value investor would like it to be since he or she would ideally like bargains which are cheaper than the average stock in the market.

To be sure, there may be reasons for the value investor to be excited about OSIM too. As of 31 March 2015, the company had a strong balance sheet with a solid net cash position (S$445.6 million in cash and equivalents and just S$189.8 million in debt). On top of that, Osim also generates a fair amount of free cash flow (more on this soon).

Would it be enough for the value investor though? That would be what he or she would be pondering.

The income investor’s view

The first nice thing about Osim that the income investor would likely notice is the company’s dividend yield of 3.7%; that’s higher than the SPDR STI ETF’s yield of around 2.8%

The next thing which might catch the income investor’s eye would be Osim’s track record in paying a dividend. In the past five years, the company’s annual dividend has been generally climbing as you can see in the table below.

Financial year ended 31 December Dividend per share (Singapore cents)
2010 2.0
2011 3.0
2012 6.0
2013 6.0
2014 6.0

Source: Osim’s earnings report

And over the same five year period, the lifestyle firm has also generated increasing free cash flow (operating cash flow minus capital expenditures). This trait is something the income investor would like to see since it’s generally more sustainable for a firm to be able to pay its dividends using the cash flow which has been generated from its daily business operations.

image (2)

Source: Osim’s earnings report

It’s not all just sunshine and rainbows here though – there are negatives too about Osim in the income investor’s view and it primarily deals with the lack of repeatability in the company’s business. After all, it isn’t every day that consumers would be willing to spend a few hundred to a few grand (the general price points for Osim’s products) on massage gadgets and massage chairs.

So, it’s fair to say that the non-recurring nature of Osim’s business may cause the income investor to have some concern. But, given all that we’ve seen with the company so far, he or she may still have a fair bit of interest – but perhaps only at the right price.

The growth investor’s view

When it comes to Osim, the growth investor might be feeling heady about its growth prospects.

Segment Revenue OSIM

Source: Osim’s earnings reports

Osim has shown consistent revenue growth across most geographies over the past five years from 2010 to 2014. Furthermore, the company’s pre-tax profits have also risen steadily in the same timeframe (see chart below).

Cash debt OSIM

Source: Osim’s earnings reports

To be sure, Osim’s latest earnings figures for the first quarter of 2015, where revenue and profit fell by 13% and 53% respectively, are certainly not the type that growth investors would like to see. But, the company’s overall track record of growth over the past few years may still be enough for to prompt the growth investor to dig a little deeper.

Foolish summary

So, there you have it. Three quick perspectives from three different investor personalities looking at the same company. Thinking as different investor personalities and coming up with different views can be a useful exercise for us.

Collectively, the differing views may be worth much more than the sum of its parts.

So, do you – Foolish reader – have another company of interest in mind? Why not give the differing views approach a try yourself and then share it with us? We all may become better investors from sharing our motley views.

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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 owns shares in OSIM International Ltd.