Tuesday 17 February 2015

Biosensors International Group

OCBC on 13 Feb 2015

Biosensors International Group’s (BIG) 3QFY15 revenue dipped 6.1% YoY to US$77.5m, as licensing and royalties revenue from Terumo dropped by 46% YoY to US$5.8m. FX translation also had an adverse impact on topline as on a constant currency basis, we could have seen a positive mid single-digit growth in the product revenue. While the group emphasized the improvement in its operating income and margin on the back of cost reduction initiatives, 3QFY15 PATMI fell 33.2% YoY to US$7.4m, bringing down its net profit margin to 9.6% from 13.8% a year ago. Following a change in analyst coverage and slightly higher margin assumptions, we have revised our FY15/FY16 revenue and PATMI forecasts upwards by 1.6%/2.2% and 5.8%/3.2%, respectively. In addition to a stronger USD-SGD assumption, we derived a new fair value estimate of S$0.60 (previous: S$0.54) based on an unchanged target P/E of 20x. We note that share buybacks had supported the counter’s recent price recovery, and it is currently trading at 28.5x, more than 1 s.d. above its 2 year P/E average, thus we maintain SELL at this juncture.

Weak earnings; FX translation effects played a role
Biosensors’ 3QFY15 revenue dipped 6.1% YoY to US$77.5m, as licensing and royalties revenue from Terumo dropped by 46% YoY to US$5.8m. 9MFY15 revenue was 4% down YoY to US$232.5m. The revenue from Terumo is expected to further diminish as the group focuses on growing its own sales force to continue gaining market share and eventually expand its reach across the whole of Japan. Adverse impacts on the group’s topline also came from currency depreciation of the SGD, EUR and JPY against the USD – On a constant currency basis, we could have seen a positive mid single-digit growth in the product revenue. 3QFY15 PATMI fell 33.2% YoY to US$7.4m, bringing down its net profit margin to 9.6% from 13.8% in 3QFY14. 9MFY15 PATMI of US$22.2m declined 36% YoY and formed 46% of the street’s estimate.

Can cost reduction initiatives sustain? 
Management had emphasized the improvement in its operating income, which saw a 4% YoY gain to US$15.7m, attributable to lower overall expenses. Comparing to 2QFY15, the gain was more prominent at 50% QoQ. While operating margin over the past nine months seems rather uneven, with a current level of 20% (1Q:19%, 2Q:13%), this quarter could be testament to CEO Mr Jose Calle’s efforts in optimising the group’s cost structure that will in turn aid bottom-line performance as well. With that said, considering that the group is still in the early growth stages, particularly with its LEADERS Free Japan Trial and CREDIT II Trial in China just completing patient enrolment, we would wait to see if the cost reduction initiatives taken are sustainable.

Maintain SELL
Following a change in analyst coverage and slightly higher margin assumptions, we revise our FY15/FY16 revenue and PATMI forecasts upwards by 1.6%/2.2% and 5.8%/3.2%, respectively. In addition to a stronger USD-SGD assumption, we derived a new fair value estimate of S$0.60 based on an unchanged target p/e of 20x. We note that share buybacks had supported the counter’s recent price recovery, and it is currently trading at 28.5x, more than 1 s.d. above its 2-year p/e average, thus we maintain SELL at this juncture.

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