Moving up north. Just a few months after acquiring access into Philippines, Indonesia and India, Cordlife has acquired 19.9% of Stemlife Bhd for RM30m. Stemlife is the largest publicly-listed cord blood bank in Malaysia. It also holds a 40% stake in Stemlife Thailand. The acquisition will be made either fully in cash or 10% cash and 8 million new shares at SGD1.30 per share.

Gains control despite only 19.9% equity. 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%.

Gains strong strategic ground. 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 tons of cash and undervalued property assets. Lastly, Cordlife now has a low cost platform to fight off price-oriented competitors.

We like the deal; look beyond the price. On the surface, Cordlife paid a high price (40x annualised PER) but they will gain a lot that cannot be quantified. On an EV/EBITDA basis, the deal is actually favourable (Cordlife 24x vs Stemlife 6x) due to the MYR76m 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% extraordinary gain. Short term earnings boost however is small.

CB fair value accounting could rear its head again. On another front however, convertible bonds issued by 10% associate China Cord Blood 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.

Still like Cordlife for the long term. 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 SGD1.44 (down slightly on dilution from the acquisition) implies 25x FY14F, which is one point above its global peers and 16% discount to its local peers.

Source: Maybank Kim Eng Research - 11 Sep 2013