飞利浦证券 把Cordlife 目标价定在 $0.84

Company Overview
Cordlife Group (Cordlife) is a provider of cord blood and tissue banking services. Cordlife operates primarily in Singapore and Hong Kong, but offers indirect exposure to China with a 10% stake in China Cord Blood Corporation.

Core earnings to increase at CAGR of 8.5%.
Strong FCF generation to sustain high dividend payout to shareholders.
Potential venture into complementary products.
Acquisition of assets from CBB would drive geographical diversification into emerging markets.
Undemanding valuations for a defensive stock.
Initiate with Buy, TP of S$0.84.
We initiate coverage on Cordlife with a Buy recommendation and TP of S$0.84. The key reasons for our positive view are as follow:

#1: Expect core earnings to increase at CAGR of 8.5% over the next 3yrs.

With increasing awareness of cord blood banking, we expect market penetration of Singapore and Hong Kong to improve materially over the next 3yrs. Cordlife is well positioned to benefit from this positive trend as one of the few private cord blood banking service providers in these markets. Furthermore, we believe that the Singapore government would keep policies accommodative to stimulate the current low level of birth rates (TFR target: 1.4- 1.5 vs 2012E: 1.28-1.30) in the country. This is evident by a recently announced S$2bn package to promote marriage and parenthood.

#2: Strong FCF generation to sustain high dividend payout to shareholders.

We expect Free Cashflow (FCF) to trend north from FY14E onwards as maintenance CAPEX requirements are likely to stay low. FCF generated by the company is highly visible and is backed by annual cashflow streams of c.S$6.25mn from the 25k existing customers on annual payment plans. We expect the strong cash generated to sustain a payout ratio of c.60% in the next 3yrs.

#3: Potential venture into complementary products.

Cordlife announced a strategic alliance with Cordlabs Asia to offer umbilical cord tissue banking services beyond its current market in Hong Kong. The alliance would allow Cordlife to provide the services in India, Indonesia, Malaysia, Philippines, Singapore and Hong Kong on an exclusive basis and in Thailand on a non-exclusive basis. We believe that this alliance would leverage on the company’s existing network and open up new growth markets for the group.

#4: Acquisition of assets from CBB would drive geographical diversification into emerging markets.

Cordlife has a Right of First Refusal (ROFR) for the acquisition of various operating assets in Philippines, Indonesia & India from Cordlife Ltd (CBB), the Australia listed entity that owned Cordlife Group prior to its demerger in June 2011, should the company decide to divest. Acquisition of these entities would provide Cordlife with geographical diversification into emerging markets that have higher birth rates and lower market penetration. The recent results of CBB suggest that its operations in the emerging markets could start turning profitable soon. As long as they do not overpay for these emerging assets, we view any potential acquisition as a positive catalyst for the stock.

#5: Undemanding valuations for a defensive stock.

Lastly, we find the valuations for the stock of Cordlife as undemanding on various matrices. Despite the defensive nature of its business, the stock of Cordlife trades at a forward P/E of only 15X. Adjusting for the cash, liquid investments and market value of Cordlife’s stake in China Cord Blood Banking Corp, the core business of the company would offer a market leading FCF yield of c.7% in FY14E and beyond. With the stock trading at our bear case valuation level, we see limited downside at this entry point.

Valuation
With strong cash generation from its matured business units, we believe that it is most appropriate to value the core business using a DCF approach. Cordlife also holds a significant 10% stake in China Cord Blood Corp that forms c.13% of our valuation of the stock. Due to its unique business model, we opine that Cordlife is not comparable to other healthcare stocks listed on the SGX on a relative valuation basis. As the cord blood banking business is highly dependent on local market conditions, we believe that comparing companies that operate in different countries is far from meaningful. There are no comparable global peers that operate in similar geography to Cordlife.

Undemanding at P/E of 15X

Given the defensive nature and positive growth outlook, we believe that the current P/E multiple of 15X undervalues the stock of Cordlife. Furthermore, the company has a very visible stream of future cashflows from its long term contracts with customers. At our target price of S$0.84, the stock would trade at a FY14/15E P/E of 19.6/17.4X respectively.

Porter’s Five Forces

On the whole, we believe that Cordlife has a fairly strong competitive business position. While supplier power is generally strong as Cordlife is a price taker of fees charged by hospitals and doctors, we believe that the company has the ability to pass on any price hikes to its customers. Entry barriers are fairly high as marketing efforts over the years have built significant amount of goodwill and brand recognition in the core markets. We believe that this makes it prohibitively costly for new entrants to penetrate their markets.

Source: PhillipCapital Research - 8 Apr 2013