1HFY13 Results Highlights
· Revenue up 18.4% yoy on higher client deliveries. Cordlife Group (Cordlife) benefitted from the baby boom during the Dragon Year as well as from successful educational efforts to raise awareness of the benefits of cord blood banking. The number of client deliveries increased 18.4% yoy in 1HFY13. Gross margin was sustained at a strong 69.9% (FY12: 69.6%) while EBIT margin jumped to 24.2% (FY12: 13.9%).
· Net profit surged 123.2% yoy due to one-off gain on disposal of associate. Cordlife completed the disposal of its stake in Guangzhou Tianhe Nuoya Biology Engineering on 12 Nov 12. This resulted in a gain of about S$2.7m. Excluding this one-off gain, net profit grew 52.8% yoy to S$5.8m.
· Earnings from China Cord Blood Corporation (CCBC) kicked in. In 1HFY13, Cordlife recognised two months of CCBC’s profit. Associate’s earnings grew 39.2% yoy to a substantial S$1.3m, mainly attributable to new customer sign-ups.
· Interim dividend of 1 cent to be paid on 5 Apr 13. We forecast a full-year dividend of 3.2 cents, based on a 60% payout. This implies a yield of 4.8%.
Our View
· Potential beneficiary of Singapore’s Marriage & Parenthood Package 2013.Cordlife directly benefits from the enhanced Baby Bonus scheme as savings in the Child Development Account (CDA) can be used to pay for private cord blood banking services. Should the government succeed in boosting fertility and birth rates, the greater awareness of cord blood banking could give a lift to the ~20% penetration rate in Singapore. Management believes there is significant upside to this as penetration rates in other Asian countries such as Korea and Taiwan are 50-55%.
· 10% stake in CCBC cemented; betting on a larger Chinese market. CCBC is the largest cord blood banking operator in China, holding exclusive licences in Beijing, Guangdong andZhejiang. It also holds a 24% stake in Shandong Cord Blood Bank. Management aims to ride on the growth opportunity in Chinawhere the penetration rate in provinces with cord blood banking operations is projected to reach 5% in 2015, from only 2% in 2010.
· New HQ to incur one-time relocation expenses but will contribute additional income. Cordlife will incur one-off costs related to the relocation to its new facility in 3QFY13. Nonetheless, we also project gross margin to improve to 70% in FY13 and 71% in FY14 on rental savings. A new income stream could come in the form of sub-leasing income as management intends to lease out about 50% of its HQ space.
Valuation
· We adjust our forecasts to reflect the higher contribution from CCBC. Share price has run up more than 21% ytd and we believe prospects are currently priced in. Maintain HOLD with a higher target price of S$0.65, pegged to 15.5x FY13F PE. We suggest an entry price of S$0.54 for a potential capital upside of at least 20%.
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