· Takeover of high-growth businesses and assets.Cordlife Group (Cordlife) has entered into a conditional sale and purchase agreement with its former parent to acquire the cord blood and cord tissue banking businesses and assets in India, thePhilippines, Hong Kong and Indonesia. Operations in the emerging markets of India, the Philippines andIndonesia have exhibited tremendous growth with revenues more than tripling over FY10-12. With this consolidation under Cordlife, we expect the group to benefit from better economies of scale, centralisation of management and increased awareness of cord blood and cord tissue banking in the region.
· Net profit CAGR of 27.5% over FY13-15. While the new acquisitions will contribute positively to top-line immediately upon consolidation, we anticipate integration costs and increased marketing expense in the near term. Management estimates additional capex of S$3.5m will also be needed. Currently,India, the Philippines and Indonesia have 6,500, 1,500 and 3,600 clients respectively. As of end-Dec 12 (1HFY13), the Philippines had turned around and posted a net profit while India and Indonesiareported much smaller losses. We forecast an average 30% revenue growth p.a. for these new markets on the back of more intense marketing activities, rising middle class segments and stronger management support.
· Rolling out new offerings. Cordlife's cord tissue banking services was officially launched in Singaporeon 12 May 13 and management noted that 10 clients signed up over that weekend. The payment plans are similar to cord blood banking schemes whereby a sum is payable upfront and a minimal fee is due each year. This should begin contributing to Cordlife's recurring cash flow after five years. As part of the group’s vertical growth strategy, there are plans to further expand its products and services beyond umbilical cord-related offerings in order to become a leading provider of healthcare options for mother and child.
· Increased capacity from relocation to new HQ.Cordlife's fully-owned space at Yishun's A'Posh Bizhub can house up to 650,000 cord blood units. This will cover the group's long-term needs and will allow for rental savings. Currently, 50% of the space is being used by the group while the rest is intended to be leased out. Based on current rental yields, management expects only to breakeven on this.
· Brighter outlooks in Singapore and China. While the Hong Kong office suffers from China's moratorium on women giving birth at Hong Kong private hospitals, this is mitigated by China Cord Blood Corporation's (10%-owned) aggressively expanding market share in China. The market carries huge potential for growth as the penetration rate of private cord blood banking is still at a low of 2.2%. Prospects are also looking better in Singapore with increased marketing efforts finally bearing fruit and the country's fertility rate improving. Management estimates that Cordlife's market share rose to 72% in 2012 from 62% in 2011.
· Maintain HOLD; raised target price to S$0.87. We raised our earnings estimates by 30% to reflect the impact of the latest acquisitions and updated our outlooks on the cord blood and tissue banking businesses. However, Cordlife's share price has run up close to 40% since mid-April and we believe the market has priced in these positives. We applied a historical average PE of 16.1x to our FY14F EPS estimate of 5.4 S cents/share to derive our fair value. Currently, the stock is trading at 17x FY14F PE.
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