Cordlife

Cordlife: 2QFY15 earnings missed estimates although revenue beat. Cordlife reported losses of $3.0m (vs 2QFY14 $4.5m gain) despite 17.5% y/y rise in revenue as large mark downs were reported on its investments in China Cord Blood Corporation (CCBC, NYSE:CO).

Through increased awareness and marketing campaigns, 2QFY15 revenue rose 17.5% to $14.3m on ~ 9.8% growth in client deliveries, bringing 1HFY15 revenue up 17.3% to $27.5m on ~11.4% volume growth.

However, a shift to lower margin packages reduced gross profit margin from 68.8% to 65.9%. As such, 2QFY15 gross profit rose a smaller 12.5% to $9.4m.

Operating profit halved to $1.1m mainly due to a spike in selling and marketing expenses incurred by an India subsidiary, which aired television commercials and increased newspaper advertising to expand market share in India.

Bottom line was hit by fair value fluctuations of its investments in CCBC.

During the period, share price of CCBC sank 8% from US$4.89 to US$4.52. Consequently, fair value of CCBC’s shares held by Cordlife recorded $1.8m losses (vs $2.3m gains in 2QFY14) and fair value on the option component of the CCBC 7% senior convertible note due Oct17 recorded $4.7m losses (nil in 2QFY14 as convertible note was acquired in Nov14, when CCBC share price was US$4.92).

Maybank-KE is more optimistic on the future.

Looking ahead, we expect revenue growth to accelerate and selling and marketing expenses to wind down as India market starts to reap the fruits of its intense marketing. Clients typically start delivering babies with 3-6 months lag from sign up, which works out to about 3QFY15.

CCBC shares had rebounded from Dec14, after bottoming in mid-Dec. We are also expecting maiden dividend payout from CCBC before May15, but did not price this into valuation.

Lastly, royalty income from CCBC and newly acquired Stemlife, less than $0.1m now, could potentially grow to contribute more significantly in 2HFY15.

Cordlife maintained its interim dividend of $0.01

Our house rates Buy with SOTP TP of $1.30