Trendlines Group - DBS Research 2016-02-11: Undervalued portfolio of B2B companies

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THE TRENDLINES GROUP LTD 42T.SI 

Trendlines Group - Undervalued portfolio of B2B companies 

Leading technology incubator in Israel. 

• Trendlines (TTGL) is a seedstage investor in medical and agriculture technology start-ups. 
• Unlike traditional VCs, incubators provide start-ups with a higher level of support such as technology labs, staffing, physical space, and strategic guidance in addition to funding. 
• TTGL is considered the best incubator in the Medtech space and is the only government franchised incubator in Agtech space. 
• B.Braun, a German healthcare provider with €5.4bn in sales is a strategic investor with 4.2% stake. 
• TTGL currently has a portfolio of 46 companies, of which 17 are in commercialisation stage. 

Exploring exit opportunities for three portfolio companies 

• The real value of an incubator lies in helping its portfolio of companies to raise more funds and exit profitably eventually. 
• TTGL has a track record of 
  1. raising follow-on funds for 75% of its portfolio companies; and 
  2. divesting 5 portfolio companies over the last 5 years at 3x - 67x its investment cost. 
• With net cash of US$22m, we conservatively forecast 15% CAGR in portfolio value over FY15-17F versus 18% average over FY11-14. 

Three companies within its portfolio are exploring M&A opportunities. 

• Even if one of them materialises, TTGL may beat our forecasts. Strong growth prospects in Medtech and Agtech. 
• Ageing population and growing demand for sophisticated medical devices will spur investments in medical device developers. 
• Rising global demand for food and water stress to help attract funds for Agtech. 
• Support for R&D by the Israeli government will also benefit TTGL. 
• Volatile earnings and lack of exits are key risks. Most of its earnings are attributable to fair value gains of portfolio companies, which is not very visible. 
• Failure to exit from existing investments may lead to negative cash flow. However, TTGL has enough cash for next 2.5 years even if there is no exit. 

Valuation 

• There has been a general de-rating of incubators in the current market turmoil due to the lumpy nature of the business and the lack of dividends. However, TTGL is trading at a whopping 55% discount to its peers, who are trading at 1.3x Price to Book (P/B). 
• Based on 1.1x FY16F P/B our one year target price is S$0.28 implying 74% upside potential.

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-02-11

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