Excerpts from analyst's report.

DBS analyst: Sachin Mittal


Leading technology incubator in Israel

etviewOne of Trendlines Group's most valuable portfolio companies, E.T View Medical, provides visual clarity during surgical procedures involving "lung isolation", and is presently generating revenues.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

sachin mittal1.16DBS Vickers analyst Sachin Mittal (right) speaking with Trendlines Group Co-Chairman Steve Rhodes on a visit to Israel recently.
Photo by Leong Chan Teik
The real 
value of an incubator lies in helping its portfolio of companies to raise more funds and exit profitably eventually. TTGL has the following track record.
(i) Raising follow-on funds for 75% of its portfolio companies
(ii) 
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.

Strong growth projected in Medtech

Increasing ageing population, improving health consciousness of developing markets and rising demand for sophisticated medical equipment will fuel growth of the Medical devices segment of Trendlines.

Tightening regulatory conditions of the medical device manufacturing industry in developed markets such as US will also open possible avenues to exit investments, with US companies looking to establish operations outside of the region.

Visiongain predicts the global medical devices market to reach US$ 398b by 2017.

SachinMittalAgtech looks lucrative

Increasing global demand for food with rising population and environmental challenges will put more emphasis on Agriculture research. Research on food tech, water savers and waste management will attract most funding according to MarketResearch.com.

Trendlines has already made investments in companies conducting research in the above fields.


- Analyst Sachin Mittal (photo)


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.

Inherently risky business model

Trendlines invests in early stage high risk technology start-ups which often take 5-6 years to generate returns. Realizing a return on the investment is dependent on a multitude of factors and the risk of failure tends to be high. Investments in 27% of companies (c. 16 companies) that Trendlines has incorporated since inception have been written off.

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