The Edge Daily

Barely a few days after making its debut on the Mesdaq Market, stem cell banking specialist StemLife Bhd has garnered its fair share of investing interest judging from its share price, which has risen as much as 200%.

Dealers say interest was largely spurred by the emergence of Berjaya Corp Bhd (BJCorp) as StemLife's substantial shareholder, following its acquisition of a 12.5% stake for RM12.9 million.
BJCorp bought the 20.63 million shares on Oct 17 and 18 — the first two days of StemLife's listing — at an average price of 62.5 sen per share. These acquisitions were done off market via married and direct deals.

On the day of listing, StemLife opened at 52 sen, well above its offer price of 33 sen, and closed at 75 sen with some 37 million shares traded that day. The counter reached a high of RM1 the following day, with some 31.5 million shares traded.

Certainly, this development has raised a few eyebrows among investors, who are puzzled as to how StemLife fits into BJCorp's portfolio of investments. It also raises the question of from whom the group bought the stakes.

"I was not aware of BJCorp's entry as the group did not approach me. We, the founding shareholders, are still in control of the company," StemLife's managing director Sharon Low tells The Edge.

BJCorp officials did not respond to The Edge's emailed questions.

StemLife's major shareholders are HSC Healthcare Sdn Bhd (20.6%), Low (12.9%), Lim Oi Wah (12.89%) and Dr Aw Tar Choon (4.82%). This leaves a free float of 49%.

BJCorp says in a statement that its entry into StemLife "is an opportunity for BJCorp to invest in a healthcare company, which is expected to have good growth potential, at a reasonable entry cost".

"StemLife looks interesting with good growth potential," says a company insider.

Having said that, analysts reckon that it will make more sense for BJCorp to raise its stake to at least 20% to enable the group to account for StemLife's earnings in terms of equity. Nonetheless, a 12.5% stake is substantial enough to warrant BJCorp a seat on the company's board of directors, based on the current ownership structure.

BJCorp's business interests span financial services, consumer marketing, direct selling and retailing, vacation time share, hotel and resorts development, recreation development, property investment and development, gaming and lottery management.

The conglomerate made a net profit of RM38.4 million in the first quarter ended July 31, 2006, on the back of higher revenue of RM784.93 million. The previous year, it posted a net loss of RM40.89 million.

StemLife is involved in stem cell therapy, which is part of a group of new techniques for replacing diseased or dysfunctional cells with healthy, functioning ones.

Stem cell banking is a technique used to harvest the cells, usually from umbilical cord blood cells, peripheral adult stem cells and bone marrow.

"I don't see how BJCorp can add value to StemLife. It could be just a passive investor," says an equity analyst. He cautions investors to tread carefully as StemLife's share price has appreciated too sharply.

Another analyst notes that BJCorp's acquisition is "out of the ordinary" as StemLife seems out of place in the group's businesses.

While analysts favour StemLife for its potential growth as it is well positioned to capture the expected surge in demand for stem cell therapy, they believe at current price levels, the counter is priced too high. They have accorded fair valuations of between 45 and 79 sen for StemLife. The stock ended at 94.5 sen last Thursday.

AmResearch says StemLife is coming on to the market at undemanding price-earnings multiples of 14.4 times based on FY2006 earnings and nine times in FY2007. The PE multiple is based on the issue price of 33 sen.

It says the company has strong cash flow, which paves the way for a generous dividend payout. StemLife's base of recurring income from annual storage fees is projected to rise from RM370,000 in FY2005 to RM1.09 million and RM2.11 million in FY2006 and FY2007 respectively.

However, the research house believes StemLife faces a risk of margin squeeze due to the company's expansion plans or costs associated with research and development to develop new stem cell therapies.

It adds that all listed American companies involved in either stem cell banking or stem cell therapies are losing money.

Another analyst expects strong earnings growth of 79% and 48% for FY2006 ending Dec 31 and FY2007 respectively, driven by new sign-up cases and rising storage revenue from its growing customer base. Also, there is further potential upside from stem cell therapy charges.

According to StemLife's prospectus, it has projected a 59.63% increase in net profit to RM6.05 million in FY2007 from an estimated RM3.79 million in the current fiscal year.