Cordlife Group

UOBKayhian on 14 Nov 2012

1QFY13 Results
·          Within expectations. Cordlife Group (Cordlife) reported a 13.0% yoy increase in revenue on the back of 2,150 client deliveries in 1QFY13, 150 more than in 1QFY12. The group attributes the increase to more births in the Dragon Year and to improved awareness of cord blood banking. Net profit rose 50.9% yoy, also on the back of higher contribution from Guangzhou Tianhe Nuoya and a S$0.3m additional interest income. 1QFY13 revenue and net profit accounted for 25% and 30% of our full-year forecasts respectively.
·          Increase in borrowings and PPE. Cordlife drew down S$3.0m from its term loan facility to pay for the purchase of Yishun A'Posh Bizhub, which is on track to being ready for occupancy by 1Q13. Power, Plant, & Equipment (PPE) also increased by S$2.9m on capex incurred for the new headquarters.
·          Forex loss of S$0.5m was recorded due to the strengthening of the Singapore dollar over the period.
Investment Highlights
·          New HQ to incur one-time relocation expenses but will improve gross margins. The group expects to incur one-off costs related to the relocation to its new facility. We expect this to affect bottom-line in the coming quarters. Nonetheless, we also project that gross margins will improve to 70% in FY13 and 71% in FY14 on rental savings. Gross margin deteriorated to 69.0% in 1QFY13 from 69.6% in FY12. Sub-leasing income should also enhance earnings.
·          Deeper stake in the growing Chinese market with a 10% acquisition of China Cord Blood Corporation (CCBC), the largest cord blood banking operator in China. Through CCBC, Cordlife Group (Cordlife) will be able to leverage on the cord blood banking businesses in Guangdong, Zhejiang, and Beijing where CCBC holds exclusive licences. Mr. Jeremy Yee, Executive Director and CEO of Cordlife, was appointed as an independent, non-executive director of CCBC.
·          Takeover of high-growth assets in the medium term. Cordlife has the right-of-first-refusal (ROFR) to acquire its former parent’s remaining cord blood banking operations in India, Indonesia and the Philippines. Management noted that operations in these markets are finally at their inflection points and revenue should see significant growth from here on due to higher awareness of cord blood banking and economies of scale. Takeovers of these assets may come in the medium term when they are deemed to be value-accretive to Cordlife.
Valuation
·          Maintain HOLD with a target price of S$0.62, pegged to a FY13F PE of 15.5x. Our valuation peg increased from 13.6x to 15.5x when we rolled over our peers’ PE average to FY13. We forecast an 80% payout which translates to yields of 6.1-7.3% in FY13F-15F.
·         We could change our call if higher contribution from CCBC offsets the expected decline in number of births as the Dragon Year comes to a close.