Why I Don't Like Stem Life

Stem Life, just like the company's business, the share price seems to have grown another leg. I was never convinced on the attraction of the business model. I am convinced that there is a commercial need being satisfied. I am also convinced that investors have gone troppo with the stock, they should check in to Subang Medical for a checkup to make sure their senses are in tune.

Its a stem cell banking and therapy service provider. Stem cell banking allows clients to store their healthy stem cells for future use in treating diseases such as blood disorders, heart disease and cancer. Possible advancements may also allow treatments for Alzheimer's and arthristis.

Main revenue base is the first time charge for extraction. Storage revenue is less than 10% of revenue. We are talking about private stem cell banking here. There are only two private stem cell banking companies, Stem Life and CryoCord. Stem Life has 64% of the banking market. Stem Life also holds a 40% equity in Thai StemLife. The fees charged by Stem Life is on the same level as the two Singapore competitors, Cordlife and Stemcord.

To me, the business model viability for a services based company hinges on the "barriers to entry". It has a first mover advantage. It is compliant with standards set by the American Association of Blood Banks and the New York Cord Blood Bank. Its labs are about to be accredited by the College of American Pathologists. The staff required are unique but not debilitatingly so. These are hurdles but not very significant hurdles. To me stocks such as Stem Life has a few big KILL JOYS drawback which are more than enough to kill off my interest: the discovery of alternate forms of stem cell harvesting and/or discovery of drawbacks of stem cell therapy and/or the discovery of alternative treatments which makes stem cell research obsolete.

The emergence of Berjaya Corp into the company is interesting as its insurance arm could package attractive insurance plans to pay for the stem cell banking plans for clients. Berjaya Corp now owns 13% of Stem Life; and 43% of Berjaya General Insurance through its 62% owned Berjaya Capital. However, that is not as explosive as what most are making it out to be because any similar companies can do the same with any insurance companies, with or without the minority stake. Hence the emergence of Berjaya Corp is no big deal.

My main aversion factor is their net profit margins, which is now very rich at 33%. That is very unlikely to continue. We know because we can look at similar regional companies in Asia such as Soiken Inc (16%), Ain Pharmaceiz (2.2%) and Falco Biosystems (2.7%). Plus, hint hint, the other two main competitor in Singapore are not listed, don't you wonder why?! Singapore has a better access to a more knowledgable client base, plus affordability is better - but why are they being kept private still? The situation is the same in Europe, the companies there have been operating much longer: best of the lot are Isotron Plc (19.7%) and Synexus Clinical Research (17.3%), but the rest gravitate towards the 10% level including Biomeriux (9.7%) and Unilabs Sa-Br (7.1%). The corporate experience shows the same for similar companies operating in the largest market for stem cell banking, the USA: Laboratory Crp of America Holdings (12.5%), Covance Inc (11%), MDS Inc (9.6%), Quest Diagnostics (9.8%), to name a few.

Taking into account my one KILL JOY factor, and putting the 33% net profit margin now enjoyed by Stem Life. Let's look at the high end of earnings estimates, for 2007 let's put it at a net profit of RM14m and for 2008 at RM18m, those are on the higher end trust me. That works out to be an EPS of 8.4 sen and 11 sen respectively, or a PER of 66x and 51x respectively. Mind you, the net profit margins will DROP from here towards the mean. The existing two Singapore companies are competitors in a lot of ways already. Just the existence of another player will trim down the net margins even faster.

Its a decent business but its not Google. At RM5.60 ... better off flying kite! (Market cap at a quite ridiculous RM924mn).