ClearStar Inchttp://www.clearstar.net/ TICKER: CLSU EXCHANGE: AIM
ClearStar, Inc. is a leading and trusted background check technology, strategic services, and decision-making information provider to employers and background screening companies.
Surefire winners don’t exist in the real world. However in the smallcap space, we think Clearstar is a pretty close alternative. Its two main growth engines – Medical Information Services (MIS) and Direct – are expanding at around 30% pa, and now represent circa 70% of the group. This is hugely encouraging, because as the company scales, a greater proportion of incremental turnover should fall straight to the bottom line.
Granted, Clearstar is currently investing in brand awareness and its in-house sales team, yet once these initiatives have fully taken effect, then we expect to see a material uptick in profits and even overall organic growth, as the declining 3rd-party channel revenues become less significant.
In terms of today’s ‘on track’ AGM statement, the company said that LFL sales had climbed 14% in the first 5 months of 2019. Not only is this in line with our FY target of $23m (+14.4% vs LY), but perhaps more importantly it is up sequentially from 11% in Q1’19. Meaning that the last 2 months must have increased by c. 17%, with Chairman Barney Quinn adding that May had been a record month. Driven by the on-boarding of previously secured clients, new contract wins and up/X-selling within MIS & Direct.
Hence, we make no change to our (de-risked) 2019 forecasts - ie EBITDA pre share based payments of $950k on turnover of $23.0m – and reiterate the 135p/share valuation. Further out, we believe ClearStar can achieve 25% EBITDA margins and sustainable LFLs of 12%-15% pa. More than justifying an EV/sales multiple of 3x by 2023 - equivalent to a theoretical stock price of c.250p/share, and equivalent to a compound 33% RoI, or 4.2x money return. Plus with approx 95% of revenues in dollars, there’s a natural hedge too for UK investors against further currency depreciation (£:$1.25), say in the event of a ‘hard’ Brexit.
Chairman Barney Quinn, concluding: “Looking ahead, we continue to focus our efforts on business sectors with a transient workforce – or the ‘gig economy’; where there is a high demand for screening to meet industry regulations; or where a worker is entering the home, such as home healthcare. Through sustained sales & marketing efforts, we are receiving greater interest from potential customers than ever before, which we are increasingly converting to sales. As a result, we are on track to achieve strong growth for full year 2019, in line with market expectations.”
Foreign buyers gorging on UK stocks
Document can be downloaded here: UK plc ‘going for a song’
Being a shareholder in a company that receives a juicy takeover offer is a marvellous feeling. Something that many fortunate investors have experienced over the past 3 years. Thanks to a spate of M&A bids by deep pocketed overseas buyers – partly triggered by the June 2016 Brexit result, which sent the £ tumbling and adversely affected the FTSE.
Consequently today, given this trend is unlikely to end anytime soon, we’ve highlighted 30 possible acquisition ideas in the attached research paper. Spilt equally between large and smallcap stocks – covering a broad selection of industries.
What’s more we believe most of these businesses are underpinned by strong fundamentals and substantial upside in the event of predatory interest.
According to Factset Mergerstat/BVR, the average bid premium paid for such deals between 2004-14 was 30% – with the figure trending upwards since the global financial crisis.
Happy investing. Published 27th August 2019