Cordlife

UOBKayhian on 15 May 2012

Results
· Downgrade to HOLD with a lower target price of S$0.53 (previously S$0.66), implying 12.8% upside from current price. We recommend entry price of S$0.42 for 25% upside.
· 5.3% yoy profit growth. Cordlife Group (Cordlife) reported 9MFY12 net profit of S$4.6m, down 25.4% yoy. Excluding one-off listing expenses of S$1.9m, net profit was up 5.3% yoy to S$6.5m, which made up 68.4% of our full-year net profit forecast.
· Revenue up 14.2% yoy. 9MFY12 revenue was up 14.2% yoy to S$21.3m, equivalent to 66.8% of our full-year forecast. The increase in revenue was mainly due to an increase in the provision of cord blood banking services of about S$1.9m driven by an increase in the number of client deliveries from about 4,900 in 9MFY11 to about 5,300 in 9MFY12 and revenue of S$0.7m from the newly-started cord tissue banking services.
· Gross margin declined. Gross margin decreased from 70.9% in 9MFY11 to 68.8% in 9MFY12, due to the increased cost of testing required due to a change in regulatory standards.

Stock Impact
· Sales growth below expectation. 3QFY12 revenue grew by 13.2% yoy, below our forecast of 24.1% yoy. We had anticipated much stronger sales as: a) FY12 revenue was expected to rebound strongly from a low base in FY11, which was caused by a deterioration of the global economic condition, b) 2012 falls in the Year of the Dragon and we had forecasted a higher number of births, and c) Cordlife was expected to recognise first time revenue contribution from the tissue banking service.

Earnings Revision
· Lowered forecast. We have reduced our FY12-14F revenue forecast by 9.7%, 9.1% and 11.1% respectively, accounting for lower-than-expected penetration rate growth for cord blood banking services. As a result, we have also lowered our FY12-14F profit forecast by 4.2%, 18.6% and 19.5% respectively.

Valuation
· Downgrade to HOLD with a lower target price of S$0.53 (previously S$0.66) as we roll over our valuation basis to FY13. We derive our target price by applying a 13.6x PE to our FY13F EPS of 3.9 S cents, in line with peers’ average. We also reduce our target valuation multiple from 16.1x to 13.6x due to lower earnings growth expectations.