Monday, 17 March 2014

Cyrosite: Sold off on short term concerns

Cryosite (ASX:CTE) was established in 2000 and provides a range of services including blood cord storage, clinical trial logistics, biorepository management and adult stem cell storage.

The company is perhaps best known for its cord blood service, which provides the ability for parents to store their newborn child's stem cells through cryopreservation. The stem cells are typically preserved for 18 to 25 years and can be used by either the child or a matching family member in treating a range of illnesses including leukaemia and life threatening blood or immune system disorders. Cryosite estimate that cord blood storage is taken up in around 1.5% of births. At around 300,000 births per year in Australia, up to an additional 4,500 newborns have their stem cells stored each year.

Cryosite expanded its range of services in 2003 to include clinical trial logistics to pharmaceutical companies and clinical research organisations. Cryosite is the largest clinical trial logistics provider in Australia with over 400 different trials to clients including Pfizer, Bristol-Myers Squibb and Johnson & Johnson Research. 

Recently, Cryosite expanded into the storage of adult stem cells through an agreement with Regeneus (ASX:RGS). The agreement provides for the storage of a patients regenerative stem cells from fat and will be used in the treatment of osteoarthritis through Regeneus', HiQCell procedure.

Market too focused on short term results

At the AGM in November 2013, management flagged that after recent strong growth in sales and profit, it would need to invest in new hires and system upgrades to meet future demand. A subsequent profit update in December 2013 estimated EBT of $800,000 to $1,000,000 for FY 2014, compared to $1,180,998 for FY 2013. Since the AGM, the share price has fallen around 44% from a high of 68.5cps to 38.5cps. The share price has since rebounded slightly to 41.5cps.


CTE recorded sales of $8.5m for FY 2013, a 9.5% increase on FY 2012. Between FY 2010 to FY 2013, sales have grown at a CAGR of 12.5%. Sales for 1H2014 were 2.1% higher than the 1H2013. 

CTE's revenues attributed to the cord blood service (and presumably other storage services) are sticky due to the revenue being realised over the life of the contract period (either 18 or 25 years). As a result, there is also significant unearned income held on the balance sheet as a liability.

CTE has a strong balance sheet, with no debt and cash assets of $5.9m as at the end of 2013. Cash assets currently make up one-third of CTE's market cap (based on a share price of 41.5cps, CTE's market cap is $19.4m).

NPAT has increased from $4.6k in FY 2010 to $1.25m in FY 2013.

Free Cash Flow

CTE generates strong FCF as can be seen from the below table:


Note the increase in capital expenditures for 1H 2014 as flagged by management. Operating cashflows remain consistent with prior periods (for 1H), however the increased spend on system and facility upgrades has reduced FCF to approximately $535k. I've estimated normalised capex to be approximately $300k p.a. which is a premium to the capex average of FY 2010, 2012 and 2013. The capex in FY 2011 was not considered in this average as it was associated with the company's relocation costs.

CTE commenced paying a dividend in FY 2012. The current annualised dividend is 1.5cps, equating to a dividend yield of approximately 3.6%. The company continues to build cash reserves after the payment of dividends and capex. 

Inside Ownership

CTE's ownership is tightly held. Chairman, Andrew Kroger is the largest shareholder with 25.1% ownership of the company and has been increasing his stake on market. Managing Director, Gordon Milliken owns around 2.8% of the company, worth over $500k at the current price.

Interestingly, CTE's largest competitor, CellCare have also gradually increased their stake in the company to 23%.


Cryosite was the first Australian company to offer private cord blood banking and is currently the second largest company with approximately 45% market share. CellCare is the largest cord blood company in Australia after the merger of two private companies in 2011. Management have flagged that sales growth may be subdued relative to prior years to due sporadic competitor discounting.


CTE continue to steadily increase the number of clients via its cord blood service. The 1.5% uptake for cord blood storage is a small target market, however the rate is quite low when compared to the rates elsewhere (from what I could find the rate in the US is approximately 5%) and CTE would benefit from any increase in the uptake rate.

Management continue to make new investments into its other operating segments. At the AGM it was noted "we are investing in a number of new development activities in both the biological services and warehousing and distribution segments". The agreement with Regeneus to store adult stem cells also provides a new revenue source.

The investment thesis is not predicated on a high growth story, however I think CTE can continue to eek out moderate sales growth as it continues to increase cord blood clients, clinical trial logistics and via new storage services such as the Regeneus agreement.
Current Valuation Metrics

CTE's market capitalisation is approximately $19m and with $5.9m in cash, has an EV of $13.5m. Based on free cash flow in FY 2013, CTE's P/FCF yield is 8.9%. On an EV basis the yield increases to 12.7% as the large cash position is stripped out (1/12.7% = 7.8 EV/FCF). I tend to prefer looking at the EV basis here as it includes the impact of debt and any cash holdings. Based on my estimates for FY 2014, the increased capex reduces the FCF yield to 5.3% or 7.6% on an EV basis.

The current valuation looks cheap, particularly when considering the ROE for 2013 (21.3%) and 2012 (20.1%) and the significant cash holding.


I've given most weight to a DCF valuation. I believe the assumptions to be conservative and the FCF will likely be understated due to increases in unearned income. As I mentioned earlier, CTE receive a lot of cash upfront on their storage services, however the revenues on the income statement are realised gradually over the life of the contract. If you look at the reconciliation from NPAT to operating cashflows, any increases in unearned income are added back to get to operating cashflow.  I have simplified the analysis by making the unearned income static, assuming that additional unearned income booked on new contracts is offset by the annual amount that is realised.

Assumptions for DCF:

- 5.0% sales growth in FY 2014.
- 8.0% sales growth from FY 2015 to FY 2018
- Terminal FCF growth rate of 3%
- WACC of 12.0%
- Capex of $600k in FY 2014
- Capex of $300k in FY 2015 and increasing 5% thereafter


The fall in share price of Cryosite presents an attractive opportunity to take advantage of the market's short-termism. Cryosite has attractive qualities including a strong balance sheet, no debt, sticky revenue, significant cash holdings, large inside ownership and strong margins. On my assumptions, I think a share price somewhere closer to 60cps is fair value. In the mean time, investors continue to receive a 3.6% dividend yield. I have purchased a holding at 41.5cps.

Note: The information contained in this post is for my own purposes only.  The post should not be confused with an investment recommendation and details should not be relied upon.


  1. Interesting read. What do you think of their warehousing and distribution business segment? This segment made twice as much profits as blood cord banking.

  2. Hi Peter
    From all accounts, the ATCC contribution remains flat and is suffering from competitor pressure, while the clinical logistics trials have been improving. The growth in the number of trials and the move to higher margin cold chain trials appears encouraging. But I agree that the warehousing and distribution is more materially important due to the higher margins compared to biological services. Most of the revenue growth has also come from this segment. I suspect that this will continue and biological services will remain fairly flat. I'm not sure of the risk with the ATCC distribution agreement not proceeding. I would think this would be logistically challenging. What are your thoughts?

  3. The drivers of the cord blood business are quite easy. ABS stats on birth rates, then checking trends. There are only two players, plus public cord banking. The current market is too small for any other player to be viable in this space, and the slow incremental growth will ensure that there is no incentive for any further players to enter.

    So we keep track of growth in birth rates and penetration rates. I disagree that cord blood segment will be flat. CellCare is probably struggling and trying to gain quick market share with discounting last year. Cryosite wisely did not respond with dropping prices. Just like Coke and Pepsi, prices will normalise in the near future. This segment has low margins, but is very important because it generates float.

    The other segment is more opaque. But I think figuring out the fundamental drivers of future growth in this segment may not be too difficult. I wish they are more forthcoming with details of their capex, but I infer that they need to beef up their systems to be able to take on more work. In the big scheme of things, the ATCC deal is not too big a concern.

    If you are willing to have a go at the main value add proposition that Cryosite offers, then I am more than happy to take discussions further.