The Edge Daily

Fertility treatment firm TMC Life Sciences Bhd, which saw its share price rise to a 52-week high of RM2.03 on May 30, is being downgraded by some analysts to “neutral” or even “sell”.

OSK Research has relegated its recommendation on the Mesdaq Market-listed firm to “neutral” from “buy” in its latest research report. The share price, it said, was already fully valued, having increased more than 100% since the research house pegged a “buy” on TMC early last year.

Standard & Poor’s Equity Research has also revised its recommendation on TMC to “sell” from “hold”, with an unchanged target price of RM1.60. This is based on a price-to-earnings ratio (PER) of 20 times against 2009 earnings per share (EPS) estimate of eight sen.

The research house believes the stock has already run ahead of its fundamentals, as it is currently trading at 2008 and 2009 PER of 42 times and 25 times respectively.

With TMC’s three new operating divisions — hospital services, wellness programmes and stem cell banking — coming onstream by 2H2008, is it worth the while of investors to buy ahead of its expected earnings from these operations in 2009? These sentiments, however, do not seem to be shared by Berjaya Group Bhd, which is controlled by Tan Sri Vincent Tan. Latest filings with Bursa Malaysia showed that the company has accumulated about 47.33 million shares, or 25.5%, in TMC as at June 5. The actual value traded is, however, not known.

This stake makes Berjaya the largest shareholder in TMC, slightly more than the latter’s founder and managing director Colin Lee Soon Soo, who now has 44.59 million shares, or 24.08%.

Berjaya’s substantial stake in TMC, which could well increase further, has led Netresearch-Asia to believe that the TMC share price should continue to be well supported. The research house maintains its “buy” recommendation on TMC with a target price of RM2.30 a share, based on a price earnings-to-growth ratio of 1.2 times.

The fertility treatment services firm has registered a compound annual growth rate (CAGR) of 28.4% in revenue in the five years from 2002 to 2007, while net income recorded a CAGR of 38.1% .

TMC, with six fertility treatment centres in the country, has more than 20% market share among local fertility centres and accounts for one-third of all local test-tube babies.

Its average pregnancy success rate of 41% is comparable to top in-vitro fertilisation services in Singapore, the UK and the US. As at Dec 31, 2007, TMC derived about 80% of its revenue from its fertility treatment services, while the balance came from other medical services.

TMC’s executive director Amos Siew tells The Edge that the company expects to see full earnings contributions from its new business divisions, especially its upcoming hospital, only by 2H2009. He describes the current year as a consolidation period for TMC. Its existing core business, the fertility treatment service, will continue to anchor the company’s earnings, he says.

It is reasonable to assume that TMC’s bottom line for 2008 will be affected by higher operating expenses of the upcoming hospital and the marketing expenditure of the wellness programme. The question for investors is, how much can the flagship tertiary hospital, Tropicana Medical Centre, contribute to the group’s earnings?

TMC is believed to have spent RM100 million (excluding land acquisition) for the multi-disciplinary hospital, which will house 52 doctors and have 179 inpatient and daycare beds.

Siew sees a quantum leap in TMC’s revenue from the Tropicana Medical Centre when a full medical team is on board. The hospital, excluding fertility treatment services, is expected to contribute more than 50% to the group’s top line in its FY2009 ending Dec 31.

Although the Ebitda (earnings before interest, taxes, depreciation and amortisation) margin in FY2009 will be lower than previous years, he says TMC’s Ebitda is expected to be maintained in the upper 30% range in FY2009, versus the 40% in FY2007.

According to Siew, TMC’s wellness programmes are typical of the firm’s growth prospects. The new operations generated RM3 million in sales from August 2007 to March 2008.

TMC’s Lee says the eight-storey hospital in Kota Damansara has no difficulties attracting doctors specialising in fertility treatment and downstream obstetrics and gynaecology services. It is learnt that TMC has received three times the number of applications as there are vacancies for its medical positions.

It is likely that its proposed transfer from Mesdaq to Bursa’s Main Board, a one-for-one renounceable rights issue and a bonus issue comprising five bonus shares for every four rights shares subscribed, has contributed to the recent rise in its share price. Much may depend on whether its expansion and board transfer plans will be on track this year. The proposed board transfer is estimated to raise some RM37 million, with an indicative share price of 20 sen apiece; and TMC may be able to offset some of the expenses arising from the upcoming hospital project.