Biosensors International

CIMB Research, Jan 7

SHARE price volatility and enlarged trading volume of late have caught the attention of many investors. It is now harder for earnings to make any meaningful impact in the next two quarters and its bombed-out valuation and change in ownership suggest that the stock is no longer well owned.

We think that the new shareholder, Citic, seek to enhance its investment value through more active participation, potentially even taking the company private.

After Citic group-backed CB Medical, took over from Shandong Weigao as the substantial shareholder (S$1.05/share for a 21.7 per cent stake in Biosensors International) last November, Biosensor's share price has seen unusual volatility on the back of rising liquidity.

Share price volatility aside, we reiterate our view that PE investors tend to explore various options where their companies have successful franchises but trade below market multiples.

There could be a rethink about whether to keep Biosensors listed or, at a later stage, whether to relist Biosensors in another market where there is better appreciation of a medical platform company.

Based on the latest reported financials, Biosensors still has S$238 million in net cash and, more importantly, US$512 million in cash. Granted that a large part of US$274 million in loans are from the MTN (US$240 million at a 4.875 fixed rate due in 2017), Biosensors has yet to reach its ceiling of US$800 million.

Given that working capital needs are typically in the US$10 million range, there is really not much need for cash at the moment. At its current share price, US$500 million represents about 43 per cent of Biosensors' market cap.

From a financing point of view, this means that both its PE investors are very capable of funding a privatisation deal on Biosensors, especially given the potential of upstreaming the cash hoard. The only unknowns then are, in the event of a take-out play, price and timing.

We urge investors to Add. Biosensors' valuation has only priced in its near-term challenges, not a potential earnings lift from the commercialisation of new products in FY15. Other products are gaining ground with various regulatory authorities and a soft launch of BioFreedom remains a source of excitement.

ADD