Stemlife Bhd IPO: Subscribe - prospects look bright

Fair Value - RM0.81 (SBB Securities)

Promising growth prospects. Development of new therapies and increasing awareness of personal healthcare should spur demand for stem cell storage. The group’s expansion in Thailand and future plans to penetrate Indonesia will further add exponential growth prospects in the medium term. The stem banking industry is estimated to grow at a CAGR of 33.8% in Malaysia, 73.9% in Thailand and 58.5% in Indonesia from 2005 to 2010.

Consistent revenue flow almost guaranteed. A consistent stream of revenue is almost guaranteed for the long term from locked-in annual storage fee. Good growth prospects in its customer base will provide the assurance of improving recurring revenue.

Already in growth cycle phase. Group revenue is mainly derived from Umbilical Cord Blood Stem Cells (UCBSC) banking. Potential is significant given Malaysia’s 500,000 birth rate annually. Tapping a mere 1% to 2% of that pool annually could greatly enhance its growth. StemLife captures 63% of UCBSC market share in Malaysia. At current upfront and annual fee structure, the group will gain 1.6% increase in profit after tax (PAT) for every 1% increase in sales volume. Elsewhere, a 1% increase in product price is likely to result in a 3.7% gain in PAT.

Potential in PBSC and therapy is tremendous. The Peripheral Blood Stem Cell (PBSC) banking and therapy segment is likely to be the next growth segment for the group. While its is much more costlier than UCBSC, the market is wider than USBSC. Revenue from therapy services is estimated to be approximately RM30,000 per procedure.

Dividend likely to be high. The management guidance pointed to 50% dividend payout ratio going forward.

Valuation. The stock is fairly valued at RM0.81 based on a Discounted FCFF three-stage growth methodology at a WACC of 16.09%. We have opted to value the stock using this method given that the group is relatively young and it is growing at a relatively high rate (the stem banking industry in Malaysia is estimated to grow at a CAGR of 33.8% from 2005 to 2010).

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