Cordlife Group

Maybank Kim Eng Research, Sept 11

JUST a few months after acquiring access into the Philippines, Indonesia and India, Cordlife has acquired 19.9 per cent of Stemlife Bhd for RM30 million (S$11.7 million). Stemlife is the largest publicly-listed cord blood bank in Malaysia. It also holds a 40 per cent stake in Stemlife Thailand. The acquisition will be made either fully in cash or 10 per cent cash and eight million new shares at S$1.30 per share.

Cordlife bought its stake from Stemlife's founders and key management - CEO Sharon Low (who has already been on sabbatical for a year) and Christina Lim, her aunt. This is essentially a control stake as they will be ceding management to Cordlife. Berjaya Group's Vincent Tan owns 12.1 per cent.

First, margins can be enhanced significantly as Stemlife can do in-house sample testing, which Cordlife currently outsources to an external lab at a higher cost. Second, it brings two new underpenetrated markets - Malaysia and Thailand - with much higher birth rates than Singapore. Third, Stemlife has tonnes of cash and undervalued property assets. Lastly, Cordlife now has a low cost platform to fight off price-oriented competitors.

On the surface, Cordlife paid a high price (40x annualised PE) but they will gain a lot that cannot be quantified. On an EV (enterprise value)/Ebitda basis, the deal is actually favourable (Cordlife 24x vs Stemlife 6x) due to the RM76 million of cash and undervalued properties that have been kept at depreciated book value in Stemlife's balance sheet since 2006. If sold, we estimate the properties (freehold commercial assets in Klang Valley) could bring in a 50 per cent extraordinary gain. Short-term earnings boost, however, is small.

On another front, however, convertible bonds (CBs) issued by 10 per cent associate China Cord Blood (CCB) could present a tricky situation. Under IFRS standards, the CBs have to be separated into debt and equity, and the fair value (either loss or gain) of the equity portion has to be recognised. As CCB's share price has spiked, a fair value loss is expected in the current quarter. As this does not impact cashflow or core profits, we would urge investors to look beyond this issue.

We still like Cordlife in the long term as it continues to pursue a strategically-sound expansion plan. We keep a "buy" on the stock but caution that the fair value treatment for China Cord Blood's convertible bonds could introduce some volatility to earnings. Our TP of S$1.44 (down slightly on dilution from the acquisition) implies 25x FY14 forecast, which is one point above its global peers and 16 per cent discount to its local peers.

BUY