Turning cautious, downgrade to Hold. We cut FY3/13-15F net profit forecasts by 9-11% as we turn more cautious in our forecasts and on lower-than-expected licensing revenue. Our SOTP-based TP is consequently reduced to SGD1.28. We downgrade Biosensors to a Hold as we see limited upside to our revised TP. While we like the long- term growth potential, we believe that near-term uncertainties may limit share price appreciation. The commercialsation of BioFreedom could be a positive catalyst but this will be an event for 2014.

Intensifying competition in Japan. Weak licensing revenue dragged down Biosensors’ 3QFY3/13 results, resulting in management revising down their FY3/13F revenue YoY growth guidance to 15-20% (from 20- 30%). Biosensors is collaborating with Terumo to regain market share but with increased pricing pressures, intensifying competition and added cost of more aggressive marketing, we deemed it hard to see a net positive effect in the next one to two quarters.

M&As necessary for long-term growth. Biosensors is likely to seek out M&As this year as it would fit into its long-term strategy of transforming into a multi-product medical equipment company.. We suspect that the recent drawdown of SGD300m from its MTN program despite being in a net cash position could be for this purpose. Depending on the specifics of any potential deals, this could be viewed positively or negatively. But we do caution that transactions in the healthcare sector are typically done at high valuation multiples. We will revisit our recommendation and TP on better clarity.

BioFreedom contributions only from 2014. BioFreedom has received CE Mark approval. More clinical trials will be conducted to further prove its efficacy. Full commercial launch is only expected in 2014 and we think that it is too far ahead to provide positive share price trigger.

Licensing not expected to last forever. While Biosensors looks cheap at 12.6x FY3/14F PER, we do not expect its licensing revenue with Terumo to last for forever. This is the key reason why our TP is lower than consensus. We value it separately using DCF but we have attributed a fair 18x PER multiple on its core business.

Source: Maybank Kim Eng Research - 13 Mar 2013