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).

Comments

bullbear said…
Yes, the market capitalization is truly ridiculous. For less than 10 m, one can probably set up a similar company. Moreover, as you pointed out, the technology is not superior or unique, therefore the barrier to entry by another competitor is low. Don't be "sucked" into such a stock at this price.
steven said…
so what'syour take on TMCLife
Salvatore_Dali said…
funny u should ask, actually wanted to put a big SELL on both stemlife n tmc life ... but on researching, it appears tmc life deserves a diff rating, will write on it soon
tanhin said…
Dear Dali

I am the silent majority enjoying reading your postings.Yes, I do think TMClife is so much different from business and growth aspect as what stemlifecan offer. And I think TMClife venturing into stem cell business is an added boost to its present Fertility treatment...there is synergy effect and real market or rather client(babies) to capture. I do make a small writing in the Sahamas forum but eagerly waiting your expert analysis.

tanhin
PJ-investor said…
Hello. Lets summarize the verdict. Stemlife is another case of the CLASSIC 'castle in the air'. Not much (maybe nothing at all) of marketing on proven case of Stemlife actually saving peoples' life. its share prices has been largely driven by Berjaya 'brand' name. Where as TMClife, is an actual case of the company helping couple to conceive. A frined of mine told me, their hospital (all of them) are crowded every working day. When i say crowded, it means packed!. You'll never get your appointment with the doctor at the time you set the appointment. Further, their new, larger, more doctor, more couples, more revenue (profit) are coming next year in Kota D'sara. So, clearly, the verdict is TMCLife. Of course, before anybody who read this comment, please watch the timing of your entry. Its a medium-term (3-5 yrs) holding. Why? Because technology evolve!
tucows said…
Dali,

totally agree with you...this stemlife thingy is just a hype. especially with the "B" involvement, it became over-rated. their story also a whole lot of "Cow"..
the reason of its success is that it managed to convince the public that this is the new wave of human technology.
I for one do not believe in such crap.
solomon said…
I am not a fan for these companies. But the recurring income model / "richmen can afford model" for these business, are the push factors that the share price goes higher each day. The Authorities should place trading restriction on it before it collapse again. Sigh...Short memory of what happen in the past.

Again, the O&G and water theme are short play. Perhaps, some external shocks these days.

I think local investor should look at NCER, a govt project. Similar like SJER. Counters like Tebrau and Mulpha.

For NCER, I am watching Ekran, which had huge land investment in Langkawi. The metaphor of changing the business model into plantation and property player. Have seen Ting paid some money RM17million to the company this year (Even small, but at least a commitment). Silvatore, any comment?
J said…
The share spread of Stemlife is low, and the liquidity is low as well. It doesn't take much to manipulate the shares.

I don't think investors are fooled. But I think Berjaya's constant buying on the shares has been pushing the prices up, and the current owners aren't selling out. So how can the shares go down? It has been defying the market movements even.

As for TMC Life, it's probably a good business model but the only thing that makes it more viable than Stemlife is that the prices hasn't gone up yet. A month back, the shares started moving upwards but rumours were abound that it was being pushed up by syndicates so there's no fundamentals on the price increase. Also, major shareholders were selling out unlike Stemlife. That being said, Quek Leng Chan did buy into it last year.

I had both shares, but I have since sold TMCLife when it went up. I don't believe in Stemlife's high valuation but I have always regretted selling so I keep buying it back. I managed to subscribe at IPO, then been buying and selling it since. It's been steadily increasing. I can't bring myself to sell it anymore since my last purchase at RM 2.80. :)
TOTOMASTER said…
care to comment on eksons & natbio? looks good from my point of view... :)
mama said…
To me both TMC and Stem life are both unethical. The former promotes sex selection through PGD and the latter processes animal stem cells in their lab and openly admit having stock piles of highly contagious Hepatitis B. It is also known that TMC is selling out unused embryos (ie. fertilised eggs) for those desperate patients. If business is all about profit and being unethical I think we should not support such enterprises in the country.