• PATMI met 25.8% of FY16F
• Room for further margin improvement
• Upgrade to HOLD on valuation grounds

Slow topline, but net profit met expectations

Biosensors International Group’s (BIG) 1QFY16 sales declined 16% YoY to US$67.0m, making up 19.9% of FY16F, whereby product revenue of US$60.5m is at its lowest over the past two years. Net profit was down 4% to US$9.5m, constituting 25.8% of our full year estimates, which is the lowest on the street.

Look to 2H for signs of core business growth

Overall sales were slow. The interventional cardiology products segment (~80% of sales) dropped 13% as ASP erosion persisted for their drug eluting stent (DES) business in China. Looking ahead, we think the group will receive decent attention from its LEADERS FREE clinical trial results presentation in Oct this year and this could potentially translate to better sales prospects for BioFreedom.

In addition, the group’s BMX-J, an OEM version of the Nobori DES, has received regulatory approval and will be commercialized across the whole of Japan starting from late FY16. While Terumo will be introducing their Ultimaster DES in Japan in 2016, management remains confident of BMX-J on the back of the product’s clinical evidence and the group’s current penetration of hospitals there.

Good management as operating income rose 21%

There has been an on-going process to optimize the group’s integrated production process for its interventional cardiology segment, which resulted in a higher gross margin of 74% for products seen this quarter (+3 ppt QoQ). We also find comfort in that management has been able to sustain a lower level of operating expenses as a % of product revenue at an average of 55% for the past three quarters. Prior to this period, levels had exceeded 60% for six quarters. Moreover, management believes there is room for further margin improvement.

Share price has tumbled quite enough

Given the above, we trim our sales forecast but raise our margin assumptions, bringing our FV estimate from S$0.60 to S$0.63. As BIG’s share price has tumbled 23% since our call to sell after its FY15 results release, we are upgrading our rating to HOLD on valuation grounds. But we note that tangible drivers for its core business are needed to meet management’s aim for revenue growth this year.

Source: OCBC Research - 4 Aug 2015