Biosensors International - A slow start for FY16

Missing expectations again; business environment remains challenging
Biosensors reported sales/non-GAAP EPS of USD67m/0.61cents for 1QFY16, representing YoY growth of -16%/5%, and missed DBe by 19% and 9%, respectively. On a constant currency basis, product revenue declined by 3% YoY. The company achieved decent OP growth of 21% from cost reduction. However, we remain cautious on the business environment as the company indicated double-digit price erosion for DES in China in different provinces. Biosensors maintained guidance of revenue growth in FY16, but competition, pricing pressure, and FX movements remain key headwinds.

Revenue weakness continues
Product and licensing revenue declined by 14% and 33% in 1QFY16, respectively. On an ex-FX basis, product revenue decreased by 3%. The company attributed the slowdown to installation delays by hospitals for cardiac diagnostics products and a single-digit decline in volume for DES business in China. Specifically, the company indicated double-digit price erosion in China, which was in line with the market. For FY16, the company suggested growth drivers would be the BioFreedom launch and expansion in Japan of the Cardiac Diagnostic segment with BMX-J. However, licensing revenue from Terumo might continue to decrease.

Margin improvement from cost reduction initiatives
On an ex-royalty basis, GM for 1QFY16 improved to 74% in 1QFY16 from 71% in 1QFY15 due to vertical integration of the production process. Effective OPM increased significantly to 19% in 1QFY16 from 8% in 1QFY15 with major cost reduction in selling and marketing expenses, G&A, and R&D. We are pleased with the margin improvement, and the company indicated that there is still scope for a further 5% improvement. Total operating income increased by 21% YoY and ex-royalty OP grew 120% YoY on the back of cost-control measures.


Technical Analysis
Daily Chart
Maintain price target of SGD0.51; risks
We base our target price on 14x FY3/16E EPS of SGD0.036. The Asia medtech peers are trading at 16x 2015E EPS with 4% growth vs. 30% for Biosensors for FY16E. We believe Biosensors deserves a discount due to an uninspiring recent track record, limited visibility on growth recovery and likely profit growth deceleration in FY17. Key upside risks include faster ramp-up of new products and improving efficiency in sales/marketing. (Read Report)

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Tuesday, 4 August 2015
- OCBC Investment Research

Source : Deutsche Bank Markets Research

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