Trendlines Group - DBS Research 2016-02-26: Decent portfolio growth masked by poor earnings

THE TRENDLINES GROUP LTD 42T.SI

Trendlines Group - Decent portfolio growth masked by poor earnings

Portfolio Value growth of 12% y-o-y was largely in line with our expectations.
One-off, non-cash IPO-related expenses impacted the bottom line adversely.
Exit from one of the three most valuable portfolio companies remains a key catalyst in FY16.

Trendlines (TTGL) is a seed-stage investor in medical device developers and agriculture technology start-ups.
Increasing ageing population and growing demand for sophisticated medical devices will spur investments in medical device developers.
Rising global demand for food and clean water will help attract funds for Agtech.
TTGL intends to expand its business to Singapore, Germany and China in FY16.

Fair value (FV) of investments in portfolio companies increased 12% y-o-y to US$84.5m versus our US$86.5m estimate. This came from incorporation of five new portfolio companies in FY15 and gains in FVs of 15 portfolio companies partially offset by declines in FV of 18 portfolio companies.
However, bottom line was hit by one-off non-cash expense from conversion of Redeemable Convertible Bonds (RCL) into the shares at the IPO.
Excluding this one-off expense, Trendlines would have reported a net profit of US$2m.

We expect TTGL to successfully exit from one of the three portfolio companies in FY16F.
In the past, TTGL has exited at 3x-67x the book value of the portfolio companies.
We forecast a CAGR of 16% in the portfolio value over FY15-17F versus 18% average over FY11-14.
With net cash of US$19m, TTGL can operate for another two years even if TTGL is not able to exit from any of its investments.

Based on FY16F P/BV of 1.1x (versus selected peers trading at 1.3x) and an estimated book value per share of S$0.25 in FY16F, we estimate a one-year target price of S$0.28.

Failure to exit from existing investments may lead to negative cash flow and losses hurting its book value. TTGL operates in a high risk-high reward technology startups space and writedowns of portfolio value can not be ruled out.

Sachin Mittal DBS Vickers | http://www.dbsvickers.com/ 2016-02-26

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