Biosensors International

Maybank Kim Eng Research on 13 March 2013

WE cut FY2013-15 net profit forecasts by 9-11 per cent as we turn more cautious in our forecasts and on lower-than-expected licensing revenue. Our sum-of-parts-based target price (TP) is consequently reduced to $1.28. We downgrade Biosensors to a "hold" as we see limited upside to our revised target price. While we like the long-term growth potential, we believe that near-term uncertainties may limit share price appreciation. The commercialisation of BioFreedom could be a positive catalyst but this will be an event for 2014.

Weak licensing revenue dragged down Biosensors' Q3 FY2013 results, resulting in management revising down their FY2013 forecast revenue y-o-y growth guidance to 15-20 per cent (from 20-30 per cent). Biosensors is collaborating with Terumo to regain market share but with increased pricing pressures, intensifying competition and added cost of more aggressive marketing, we deem it hard to see a net positive effect in the next one to two quarters.

Biosensors is likely to seek out M&As this year as it would fit into its long-term strategy of transforming into a multi-product medical equipment company. We suspect that the recent drawdown of $300 million from its medium-term note programme despite being in a net cash position could be for this purpose. Depending on the specifics of any potential deals, this could be viewed positively or negatively. But we do caution that transactions in the healthcare sector are typically done at high valuation multiples. We will revisit our recommendation and TP on better clarity.

BioFreedom has received CE mark approval. More clinical trials will be conducted to further prove its efficacy. Full commercial launch is only expected in 2014 and we think that it is too far ahead to provide positive share price trigger.

While Biosensors looks cheap at 12.6 times FY2014 forecast PE, we do not expect its licensing revenue with Terumo to last forever. This is the key reason why our target price is lower than consensus. We value it separately using discounted cash flow but we have attributed a fair 18 times PE multiple on its core business.

HOLD