SINGAPORE (Dec 11): The Trendlines Group’s announcement at end-October that it will start paying dividends in the next financial year could boost returns for long-suffering shareholders of the medical technology incubator. Those who bought into the stock at its IPO in November 2015 have seen the value of their investments more than halve since.

Shares in Trendlines rose as much as 10% on the news, to close at 17.5 cents on Oct 30, but retreated to just 14.3 cents by Nov 23. They gained 10% again on Nov 28, following the release of a favourable analyst report. The stock closed at 14.5 cents on Dec 5.

Trendlines is an early-stage investment company focused on companies with innovative technologies for use in the medical and agricultural industries. It is based in Israel and has a portfolio of some 50 companies. Information on the company’s website says it has raised more than US$160 million ($216 million) in funding, excluding government grants, since it started in 2007. Late last year, together with German medical device company B.Braun, it established Trendlines Medical Singapore, a medical technology start-up incubator.

Trendlines asserts it is not a venture capital firm; for one, the company hothouses the start-ups at its facilities. But Trendlines does have a similar business model to that of a VC. Two of the companies in its portfolio have been listed on the Tel Aviv Stock Exchange. There have been seven exits as at end-November.

Chairman and CEO Todd Dollinger emphasises that Trendlines’ ultimate aim is to monetise its investments. “We have a clear mission, which is to create and develop companies to improve the human condition. But we can’t do that unless there’s an economic opportunity attached to it, or we won’t be around in a couple of years,” he tells The Edge Singapore after the recent signing of a memorandum of understanding with the National Healthcare Group to develop technological solutions to improve inpatient care. “The starting point is always to identify need, and whether it’s sufficient for the economic opportunity. You’ll also be looking at the competition and who can acquire it later, because most likely you’re going to want to go to a large company and talk to them about distributing the product.”

Peer review Dollinger and his co-chairman and co-CEO Steve Rhodes reckon Trendlines has had trouble gaining a following among investors because it does not have a peer group in Singapore, which could in turn have resulted in poor understanding of the company among the investment community here. The companies that Trendlines considers its peers are listed on the London Stock Exchange. They include the Boston, Massachusetts-based PureTech Health, an advanced clinical stage biopharmaceutical company; and Allied Minds, another US company that focuses on inventions out of universities and the military.

There are, however, a few listed companies that focus on investing in start-ups and companies at later stages of development and aim to exit these investments for a profit.

One is Hotung Investment Holdings, a VC group that listed on the Mainboard of the Singapore Exchange in 1997. Hotung’s portfolio is focused on technology firms in Taiwan, mainland China and Silicon Valley. After a recent review of its investment targets, Hotung now invests mainly in companies in the areas of e-commerce, smart home components, biotechnology and agriculture. It has brought some 200 companies to the public market over the course of the past two decades, and has consistently generated earnings, save for the difficult years during the global financial crisis and in the first two years after its IPO.

Its shares have also done well, gaining more than 45% over the past year. The benchmark Straits Times Index is up 16.8% in the same period. Hotung’s total return, if an investor had reinvested his dividends, would be more than 50%. On a 10-year basis, Hotung has returned 5.9% on an annualised basis. At current levels, the stock has a dividend yield of 7.2% and is trading at 0.67 times its book value.

Then there is k1 Ventures, the investment arm of Keppel Corp, which is preparing for liquidation and intends to return cash to its shareholders. On Nov 19, k1 announced that it had completed divesting its entire interests in US financial services firm Guggenheim Capital for US$221 million. That represented the last of its assets, and the following day k1 suspended trading of its shares.

According to its annual report for the financial year ended June 30, 2017, k1 has had an excellent year. A final dividend of 6.5 cents was declared. Together with the $41.1 million distributed during the financial year, which included dividends and capital reduction distributions, shareholders would have received a cumulative $2.30 per share in distributions. Over a 10-year period, k1’s total return on an annualised basis is 14%. At the time of its suspension, k1 was trading at a yield of 8.6% and at 1.01 times its book value.

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Higher valuations At current levels, Trendlines is trading at about 0.7 times its book value. The company’s valuation could improve as it starts to generate earnings. For its 3QFY2017 ended Sept 30, Trendlines posted earnings of almost US$3 million — nearly double from the year before. Turnover for the three months was US$6.8 million, 65% higher than the year before, driven by the substantial gain of US$5.3 million from a change in the fair value of its investments in its portfolio companies. Income from services provided to the portfolio companies came to US$1.3 million, 22.6% higher y-o-y. On a nine-month basis, earnings amounted to US$3.6 million, a reversal of the US$3.8 million loss recorded for the same period last year. Trendlines has yet to post a full year of profits.

During the quarter, Trendlines announced its eighth exit with the sale of its 6% stake in MitrAssist Medical to Wai Tech (Hong Kong) Holding for US$1.15 million. MitrAssist is developing a solution to repair heart valves. However, gains from the sale and from an increase in the fair market value of some of its portfolio companies were offset by a write-down of US$2.1 million for two companies. The company also booked a US$1.8 million decrease in the fair market value of other portfolio companies “mainly as a result of the completion of fundraising exercises at less favourable terms to the company, and general commercial or technological difficulties”.

However, the historical performance of Hotung and k1 would suggest that earnings and valuations are not necessarily the biggest drivers of returns for companies that invest in other companies. Rather, the bulk of returns come from dividends paid upon successful exits.

And measured by exits, Dollinger says Trendlines is not doing too badly. “We’re 10 years old. We started almost 90 companies, and eight of those we have since put in the hands of multinational corporations, so we’re very pleased with that ratio,” Dollinger says. Trendlines’ most valuable exit came in 2014 at 79 times the company’s investment. More recently, in June, the sale of a stake in a company called BioSight to private equity group Arkin Bio Ventures netted the company US$1.3 million, or an estimated return of 216 times. Other exits include the acquisition of fluid monitoring start-up FlowSense for US$9.5 million in 2013 by Baxter International; and the acquisition of hernia mesh placement technologies developer PolyTouch Medical, by device maker Covidien.

Trendlines has adopted a dividend policy for FY2018 and FY2019. The company will pay out 90% of the royalties it receives when one of its former portfolio companies launches a product next year. It will also pay out 40% of net cash after tax proceeds from exits.

In a Nov 27 report, NRA Capital analyst Liu Jinshu says “the full upside of potential exits has not been priced in”. He points to what he deems to be 11 “high-confidence” companies in Trendlines’ portfolio, from which he derives a valuation of US$139 million for the whole portfolio. That works out to 22.5 cents a share.

“Most of [the 11 companies] have the potential to be exited at valuations of more than US$100 million, based on transactions at comparable companies,” Liu writes. For example, ApiFix, has peers in the orthopaedic industry that were acquired at valuations of US$212 million to US$410 million in the past two years. “Leviticus Cardio is in a race to make the world’s first wireless left ventricular assist device,” he adds, noting that other makers of such a device have been acquired for “billions of dollars” in the past two years. “The price tag for Leviticus is likely to be steep.”

Liu is also positive on Trendlines’ collaboration with Haier Hai Chuanghui, the incubator and venture unit of China’s Haier Group Corp. “The China market is significant due to its size and its potential as a low-cost clinical trial and manufacturing hub for Trendlines’ portfolio companies,” he says. “The Haier MOU… will provide Trendlines with significant deal flow as it has some 3,600 incubation projects and 1,333 venture capital investments at the end of 2016.”

Liu estimates that Trendlines could record earnings of US$5.3 million in FY2017, on the back of US$17.2 million in revenue. For FY2018, he forecasts earnings growth of 18% y-o-y to US$6.3 million, with a 1.3% rise in revenue to US$17.4 million. He rates Trendlines “overweight”, with a fair value of 22.5 cents a share.

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