Gamble of the week: Cutting edge cell storage

published 17 August 2012

Stem cells are unlike other cells in that they are undifferentiated that is, they can, under the right conditions, turn into, say, heart cells or skin cells, or any other kind of cell in the body. They are found in embryos, but also in the body's repair systems. Recent medical advances mean that it is possible to harvest these cells to treat illnesses such as cancers, and even grow entirely new body parts, thereby reducing our reliance on donor transplants. Stem cells are already being used to treat more than 70 illnesses, including leukemia, Alzheimer's, cerebral palsy and many other serious ailments.

The trick is to extract the cells while the patient is still fit and healthy, and then cryogenically freeze them. The earlier the cells are harvested, the higher the acceptance rates, the lower the risk of disease transmission and the better the chances of success. Although samples can be taken from adult blood or bone marrow, it is much more effective to extract them from the umbilical cord of newborn babies.

This is where my tip Cryo-Save fits in. (Note: Cryo-Save is not involved in controversial embryonic stem cell research.) It extracts the cells, and currently stores more than 200,000 samples in its freezers. It presently has a near-50% share of the European market. Cash flow is strong and barriers to entry are high. Customers typically pay an upfront fee to store cells for an initial period of 20 years. So the business model is pretty robust.

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Cryo-save (Euronext: CRYO)

But it's a different story for the share price. Recent share-price declines have been caused by Europe's troubles in Spain and Italy, tough austerity measures have affected the rate at which new samples are collected and frozen. In response, the company's board is focusing on re-invigorating its position in southern Europe, along with finding €2m per year of savings. The benefits of this should begin to flow through in the second half.

Broker Daniel Stewart is projecting 2012 revenues and earnings before interest, tax, depreciation and amortisation (EBITDA) of €39.1m and €2.8m respectively, alongside an eight cents dividend. I value the stock on a one times sales multiple. Adjusting for net cash of €3.4m and €1.7m of deferred consideration, that delivers an intrinsic worth of €4.30 per share.

There are some risks. As a small firm its shares are fairly illiquid. There are also risks associated with foreign-exchange movements, regulatory changes and the threat from competing technologies. That said, once the European economy picks up, Cryo-Save's operational gearing should boost earnings.

Broker Daniel Stewart has a price target of €5, and interims are out shortly.

Rating: SPECULATIVE BUY at €2.35 (market cap €23m)

Paul gained a degree in electrical engineering and went on to qualify as a chartered management accountant. He has extensive corporate finance and investment experience and is a member of the Securities Institute.

Over the past 16 years Paul has held top-level financial management and M&A roles for blue-chip companies such as O2, GKN and Unilever. He is now director of his own capital investment and consultancy firm, PMH Capital Limited.

Paul is an expert at analysing companies in new, fast-growing markets, and is an extremely shrewd stock-picker.