ClearStar, Inc. is a leading and trusted background check technology, strategic services, and decision-making information provider to employers and background screening companies.


Deeply undervalued, high growth stock
Published: Feb 10 2020

Occasionally even professionals lament about ‘the one that got away’. However investing is a bit like surfing, ‘you don't need to catch all the big waves to still have a great time’.
Luckily for investors, the ClearStar ship has not sailed yet, despite the shares (at 49p) trading at a 55% discount to our 115p/share valuation. This unjustified gap between price (ie what you pay) and value (what it is worth) is likely to close at some point. Especially as the firm continues to deliver new business wins, double digit organic growth, improving operating leverage and higher margins.
Indeed today, it announced another significant contract win (min $0.4m in 2020). This time with a leading facilities management (FM) group, to provide screening for people entering its 120,000 locations across North America serving numerous industries.
Fine, but what about the numbers? Well, we reckon 2019 results were in line with expectations - $300k of adjusted EBITDA (pre SBPs) on $23.0m of revenues - and hence make no change to our forecasts. An estimated 72% of turnover is now derived from CLSU’s two strategic growth engines (ie Medical & Direct), that together expanded by >26% (all organic).
Moreover looking ahead, this latest customer endorsement, alongside ongoing pipeline conversion, generates robust visibility, with the company anticipated to be cashflow neutral/positive in 2020, on sales & EBITDA of $26.0m (13.0% LFL) & $1,260k respectively.
Add all this up, and we think ClearStar remains a deeply undervalued, high growth stock - priced at a compelling 1x 2020 EV/sales vs 3x for recent M&A activity.
Brief lull in financial screening volumes
Published: Dec 17 2019

Underlying demand for ClearStar’s tech-rich background & medical (MIS) screening services remains buoyant, as evidenced by its record orderbook and healthy pipeline – augmented by November’s ebullient US jobs report, where unemployment fell to a 50-year low of 3.5%.
However as with many ‘industry disruptors’, there are occasional bumps along the road, with the Board saying today that Q4’19 “financial institution screening volumes [eg to multi-national banks] have been lower than previously anticipated”. Due to “political uncertainty in the US & abroad”, along with industry “realignments” pushing work into 2020.
As such, we have pared back our 2019 revenue and adjusted EBITDA (pre SBPs) estimates to $23.0m (+14% vs $23.75m B4) and $300k ($700k) respectively - with the softer volumes only partially offset by strong growth in the lower margin MIS (+23%) division. Equally this adverse mix shift feeds through into 2020, where our numbers have also been trimmed to $26.0m (vs $26.6m B4) and $1,234k ($1,885k). 
Similarly the valuation  drops from 135p to 115p/share, albeit the stock continues to trade at a material discount to peers. In fact, investors should be aware that Silver Lake (private equity) acquired rival First Advantage last month at circa 3x EV/sales (ED est) vs ClearStar on 1.2x 2020 turnover - hence illustrating the potential upside.
Interim results interview September 2019
Published: Sep 19 2019

Bob Vale, CEO, and Jennifer Balleza, CFO, discuss the stand out performances of Direct and MIS, and their expectations for the second half.
Clinically proven to deliver faster growth
Published: Sep 18 2019

In 1951, a delivery driver indecently assaulted an American housewife. During the subsequent court case, the US judge awarded damages against the employer for lack of over-sight. Thus giving birth to today’s background screening industry.
Fast-forward 68 years, and there are now approx. 57m Americans (source: 2018 Gallop poll) working at least part-time in the gig economy. Here the elderly rely on their domiciliary staff to be both honest and competent carers. Equally Angie’s List users trust that the plumbers, builders and/or electricians they hire, have the necessary insurance and qualifications.
Not surprisingly this is a massively complex task, made worse by the largely siloed nature of the records held within each State and county. Enter ClearStar, whose fully automated and mobile-centric background & medical (MIS) screening services are disrupting the sector. 
So much so that this morning, the firm posted 16.9% LFL revenue growth in H1’19 to $11.6m vs $9.9m H1’18. Split 21.7% Q2 ($6.5m) vs 11.4% Q1 ($5.1m), with Aug ’19 YTD being 18% ahead of LY.
The stand-out performers were once again Direct (+49% to $4.2m) and MIS (+25% to $5.0m), which together climbed 36% in H1, and contributed 72% (or $8.3m, excluding divisional overlap) of the group. The latter enjoying strong demand for drug testing, particularly after the gradual legalisation of cannabis for recreational use, and the launch of a new combined substance abuse & alcohol product in Q2.
With regards to the numbers, we’ve lifted our FY19 turnover forecast to $23.725m (from $23.0m before), but held the adjusted EBITDA (post SBPs) at $650k (split H1 $187k & $463k H2) mirroring the MIS mix shift (ie lower GP %).
Similarly, net debt is anticipated to close Dec’19 at $1.2m (vs £1.0m June & +$934k cash in Dec’18), following the H1 capex ($1.2m), working capital and one-off payments ($464k). While in September, the CLSU extended its $5.0m credit facility ($2.1m drawn-down as at June) with Silicon Valley Bank until Oct’21. Demonstrating the lender’s considerable confidence in the business, and providing sufficient headroom to fund future organic growth.
Our 135p/share valuation remains unchanged.
Shooting the lights out
Published: Aug 08 2019

Twitter is an incredibly useful service, albeit it definitely makes it much harder to invest, when whole industries can be rocked overnight by a simple tweet from the White House. However what President Trump has been 100% consistent on, is putting ‘America First’.
Indeed we believe this policy should continue to support the US as the best performing G7 economy heading into the Nov’20 Presidential Elections, and remain the ‘destination of choice’ for many fund managers. Fortunately too for UK investors, there are US domestically-focused companies listed right here in London.
Take ClearStar, a tech-enabled background & medical screening (MIS) specialist, based in Atlanta (Georgia) that is both expanding rapidly & materially undervalued. Today the firm said that it had backed up June’s “highest ever monthly revenue [Est +29% organically]” with another blistering performance in July. Not only breaking the $1m/month barrier at its leading MIS division, but also delivering total revenues of $2.25m, up approx. 26%-30% LFL.
Growth is being driven by the group’s best-in-class mobile software, on-boarding of clients, contract wins and up/X-selling. Augmented by favourable macro tailwinds, such as the ongoing popularity of the gig economy, crackdowns on illegal workers & legalisation of cannabis for recreational use.
Consequently we are becoming increasingly confident that CLSU will hit (& perhaps even exceed) our conservative FY19 revenue forecast of $23.0m (14.4% LFL), and reiterate the 135p/share valuation. In fact if this momentum is maintained, then there should be scope for future upgrades in due course.
Organic growth surges further ahead
Published: Jul 09 2019

According to an Aug’18 Gallup poll, there are around 57m Americans, who work at least part-time in the ‘gig economy’. An enormous number, with many still not vetted thoroughly beforehand, in terms of checking for correct licenses, qualifications, training, criminal records and so forth.
As such, there has been a steady stream of serious incidents, where ‘rogue’ contractors, financial advisors, chauffeurs, care providers and other casual staff have acted improperly. Not only endangering end-user property/safety, but also harming the brand, and sometimes even breaking the law.
Enter ClearStar, a tech-enabled Human Capital Integrity firm, focusing primarily on this transient workforce within the broader $4bn global background & medical screening market. This morning the company reported that H1’19 turnover had climbed 17% to $11.6m (vs $9.9m LY), with June up nearly 30%. Sequentially too, Q2’19 LFLs were 22.6% above LY, and more than double the 10.9% posted in Q1.
Going forward, we make no change to either our FY19 forecasts of $950k in EBITDA (pre SBPs) on turnover of $23.0m, or 135p/share valuation. Equally though, we recognise there is scope for upgrades as the year progresses, and look forward in hearing more positive news at the interims in September. At 54p, the stock looks materially mis-priced, trading on 1.0x EV/sales vs 5.3x for peers.
CEO Robert Vale adding: “This was a fantastic period for ClearStar as we delivered strong revenue growth, particularly in direct services, which increased by almost 50%. With an expanding pipeline and a booming US jobs market, we remain confident of achieving strong growth for FY19.
Organic growth is accelerating, and quickly
Published: Jun 18 2019

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.


ClearStar Inc FY 2018 results: Interview with Management
Published: May 15 2019

CEO Bob Vale and interim CFO Jennifer Balleza discuss ClearStar’s strong growth in 2018 (like for like revenues +13.1%) and prospects for further significant growth.
How to buy $1 bills for less than 25 cents
Published: May 13 2019

GARP investing is all about buying the right stocks, run by the right management teams, and importantly at the right price. Not an easy combination to find in today’s markets. However sometimes, just such a company could be hiding directly under one’s nose.
Take ClearStar, a tech-enabled Human Capital Integrity specialist - who after a period of heavy IT/software investment - now enjoys 1st mover advantage within the multi-$bn US employment & medical screening market. Indeed having constructed a formidable ‘tech-moat’, the firm is quickly establishing itself as the ‘go-to’ provider and ‘straight through’ processor of such automated services.
Going forward, the trick will be to maintain momentum – 2018 sales were up 13.1% LFL to $20.1m ($17.8m LY) delivering +$154k EBITDA (pre SBPs vs -$391k LY) – and reap the rewards of favourable operating leverage and 35%+ EBITDA drop through rates. Plus, with approx 95% of revenues in dollars, there’s a natural hedge for UK investors against £ weakness in the event of a ‘no deal’ Brexit.
But that’s not the best part. The stock at 59p, trades on only 1.2x EV/sales vs 5.2x for peers, and at a wide discount to our 135p/share valuation. In fact, push the clock forward to 2023, we think the price could reach 250p – and that would not be expensive either. Representing a 4.2x money return, or a 33% pa ROI. Moreover, there is a sense of inevitability about all of this. At some point we suspect the penny will drop as investors wake up, mean reversion will kick in and the price will re-rate sharply upwards.
Finally, if you’d like to meet CEO Robert Vale and Interim CFO Jennifer Balleza in person, then please email [email protected] to reserve your place at the 5.30pm corporate presentation on Thursday 16th May at Luther Pendragon’s offices (48 Gracechurch Street, London, EC3V 0EJ).
Happy customers beget happy investors
Published: Apr 29 2019

World-class companies have one thing in common. They are all totally committed about delighting their customers. Knowing that this can create a powerful feedback loop, and likewise trigger more client wins, higher hit rates, positive referrals and follow-on work.
Today we saw this virtuous circle in action again at ClearStar, a specialist in background & medical screening solutions. Announcing that it had secured a new 3 month $350,000 contract. Both extending and expanding the services it already provides to a relatively new professional services client within the financial services space.
Indeed, this customer only came on board in November and obviously likes the service. Having ramped up revenues from a standing start 6 months ago to an annualised run-rate of >$1.0m pa. Better still, we understand there might be further X-selling opportunities in due course with other parts of the same group. 
In terms of the numbers, we make no change to our 2019 estimates or 135p/share valuation, but are encouraged by the increasing visibility and momentum. At 59p, the stock trades at a wide discount to peers, despite growing at approximately  twice the market rate.

Double digit growth continues into Q1'19
Published: Apr 10 2019

Long term value creation is all about customer focus, profitable growth and 1st class execution. Concentrating on what clients want today and in the future - and doing it better than anyone else. We think that Clearstar, a technology-rich background employment and medical (MIS) screening provider, has this in spades. Saying this morning, that its strong growth in 2018 (+13% to $20.1m) had continued into Q1’19 - posting record turnover, up 11% LFL to $5.1m ($4.6m LY).
Better still, this increase is being driven by the more strategically important Direct (+37%) and MIS (+23%) divisions (c. 2/3rds of H2’18 sales), offset by a modest decline in channel partner revenues. Here we understand some attrition has been experienced, due to a few price-sensitive accounts switching to cheaper, less advanced alternatives. 
The latter has taken a little bit of the wind out of Clearstar’s top line sails. Yet big picture this churn is not a major problem, since by the end of the 2019, Indirect should represent <30% of the group. With the rest coming from the two other far more differentiated and faster expanding operations. What’s more, the resultant improved mix should also eventually feed through into higher EBIT margins. 

Hence, we make no change to either our 135p/share valuation, or 2019 forecasts of $950k EBITDA (post SBPs) and cashflow neutrality – despite nudging LFLs down slightly to 13% from 15% previously. 
'Disruptive' US tech firm set for banner 2019
Published: Jan 23 2019

ClearStar is an Atlanta HQ’d tech firm that is disrupting the $4.0bn-$4.5bn employment & medical (MIS) screening sector. Here, we think its leading cloud hosted mobile/desktop solutions - including biometrics/facial recognition – could even eventually become the industry’s de facto standard. Replacing less efficient & more time-consuming background checks with much faster, IT-centric customer/user-friendly and fully automated applications. 
Encouragingly, this ‘competitive advantage’ is visible in results as today’s update shows, with 2018 sales climbing 13% (15% H2 vs 11% H1) to $20.1m (vs $17.8m LY) thanks to impressive performances from Direct (up +28% to £5.9m) and Medical (+25% to $8.2m). 
Together these 2 divisions (excluding MIS overlap) now account for c. $12.9m of 2018 turnover, or approx. 64% of the group. However, we predict this will rise to c. $16.2m (or c.70%) in 2019 – thus further propelling LFL growth in 2020 in line with improving mix. 
From a risk perspective, forward visibility is excellent with c.95% of revenues derived from everyday recurring tests, complemented by a robust balance sheet (ED estimated net cash >$1m Dec’18) and >90% of the business coming from North America (re minimal exposure to BREXIT and/or £ weakness). Additionally we don’t see an imminent US recession either, since rarely does GDP turn negative in the 12-24 months preceding a Presidential Election (Nov’20). 
Like CEO Bob Vale says, we believe that the stock has reached an “inflexion point… and look to the future with confidence.” In fact, given the higher growth projections, we have upgraded both our 2019 revenue forecast to $23.1m (delivering EBITDA of $950k & cashflow breakeven) vs $22.8m, and valuation from 120p to 135p/share. Reflecting potentially >100% upside for patient investors vs today’s price.
2 new contracts totalling over $1m of revenues
Published: Nov 20 2018

Founded in 1995 and floated at 57p/share in July’14 (raising £8.8m gross), ClearStar (CLSU) is a pioneering technology provider to the c. $4 billion global job screening (60% of H1 sales) and drug/medical testing (40%) markets.
10 years on from the $600bn Lehman Bros bankruptcy and subsequent financial crisis, regulators have been busily cleaning up the industry in order to prevent it from ever happening again. The industry needs the best employee background checking solutions available, with news today of one such professional services firm opting to go with ClearStar. 
A landmark agreement for CLSU, since it is the first within this targeted vertical, and provides a beachhead into the global financial sector. Furthermore, there was also a major contract win for MIS. Here, ClearMD will be deployed by a large consumer reporting agency to provide its clients with mobile-managed drug screening. 
Commencing next year, together these 2 deals with 2 new customers should generate >$1 million of annualised revenues, thus underpinning our forecasts for FY19 and beyond. 
Finally, we would add that in terms of valuation, company offers risk tolerant investors significant potential upside. In fact we calculate the stock to be worth 120p/share - or more than double today’s 58p, representing a mere 1.3x EV/sales multiple, despite expanding faster at 14.6% (FY19) than the peer average (9.1%).
Exciting new channel partner
Published: Oct 16 2018

Founded in 1995 and floated at 57p/share in July’14 (raising £8.8m gross), ClearStar (CLSU) is a pioneering technology provider to the c. $4 billion global job screening (60% of H1 sales) and drug/medical testing (40%) markets.
Often the best ideas are the simplest. Take the humble employee ID and/or visitor card. There are probably 10s if not 100s of millions of these dished out globally each year to new recruits, temporary workers, contractors, visitors, etc. Not only costing a small fortune to produce, but also needlessly sucking in vital resource, slowing up the on-boarding process and damaging the environmental (re plastic).
However, one way of streamlining the whole process is to automate it on mobile. This is where Virtual Badge (owned by Florida-based Disaster Solutions) fits in. From a standing start, its patented smartphone ID badging system (see below) has already signed up a host of key customers, such as Clayton, Great Explorations, SOP technologies, ISTC Training Council, Colorado Childrens Hospital, etc.
Today came news that it had selected ClearStar’s leading background screening & facial recognition solution (ClearID) to provide it with remote ID verification. Integration will occur over the next couple of months, with go-live expected by year end.
Although we make no change to our financial forecasts, we see this kind of partnership offering substantial X-selling synergies both within Virtual Badge's target markets – namely the gig economy, construction & engineering, healthcare, membership organisations, youth sports and at secure facilities - and across ClearStar’s more established client base. 
At 65p the stock trades at a near 55% discount to our 120p/share valuation – equivalent to a paltry 1.5x EV/sales, in spite of growing quicker than the sector average.
An interview with the management of ClearStar Inc, Sept 2018
Published: Sep 24 2018

Robert Vale, CEO and David Pattillo, CFO, presented the group's financial and operational performance highlights for the 6 months to end of June and lay out the plans for future growth.
Valuation raised due to accelerating growth
Published: Sep 17 2018

Founded in 1995 and floated at 57p/share in July’14 (raising £8.8m gross), ClearStar (CLSU) is a pioneering technology provider to the c. $4 billion global job screening (60% of H1 sales) and drug/medical testing (40%) markets.
Today’s H1’18 results appear very encouraging: sales climbed 10.8% to $9.9m ($8.9m LY) - representing their highest level ever for a 6 month period, with LFL growth being significantly faster than the broader market. Here, the standout performers were MIS (up +27% to $4m) and Direct (+22% to $2.8m: incl 15% of MIS). Together, these two divisions now account for 62% (or $6.1m) of turnover vs 56% 12 months ago – and are forecast to jump to 67% in H2 and 70.3% next year.
Consequently, with almost 2/3rds of the Group expanding at >22%, it does not take a 1st class honours degree to realise that good things are about to happen. What’s more, based on the normal flow of repeat business, augmented by recent client roll-outs, on-boarding and planned implementations, revenue visibility for this year and next looks excellent.
In fact, irrespective of some channel attrition, we envisage total H2’18 sales will advance 12.9%, hitting our FY target of $19.9m - and then leap by another 14.6% in 2019 to $22.8m and 15.9% in 2020.
Similarly, alongside tight cost control & cash management - re: H1 opex flat at $6.3m YoY, and OCF +$283k ($323k LY) - profits have reached a major inflexion point too. The firm posting its first positive EBITDA in the period ($45k vs -$235k: post SBPs), and we predict, will ultimately push EBIT margins from -6.3% this year to 19.3% by 2025 – in line with industry averages of c.20%-25%
Therefore in terms of the numbers - based on our DCF modelling, a range of benchmarks and a 12% discount factor - we are upgrading our valuation from 100p to 120p/share – or >50% above the 78p price, but still only equivalent to 1.5x 2022 EV/sales. 
Record revenues and positive EBITDA
Published: Jul 18 2018

ClearStar (CLSU) is a leading technology provider to the multi $billion job screening (63% of $17.8m 2017 revenues, up 11% LFL) and drug/medical testing (H1’18 40%) markets. The firm, head-quartered in Atlanta Georgia (US), employs ~90 staff; and enjoys high retention rates of >90%, and excellent forward visibility reflecting the everyday, low-cost and often mandated nature of its products.
Not only is the Dollar the world’s reserve currency, but also the US economy is on a roll. Aided by unemployment of 4% and January’s sweeping tax cuts, the Atlanta Fed are pencilling in Q2’18 GDP of 3.9% (vs 2.0% Q1). Meaning that, with CPI inching up to 2.9% in June, Q2 domestic output could in nominal terms even tip 6.5% (vs UK at ~3.5%). 
Unsurprisingly, this is welcome news for Georgia-based ClearStar. A technology-rich (R&D accounts for ~10% turnover) provider of every day, low cost background checks for job seekers and drug/medical testing services (MIS), generating 90%< of its revenues from the States
This constructive demand picture - combined with expansion in the ‘gig’ economy, market share gains and the gradual legalisation of cannabis - is helping to power double digit top line growth. With the firm achieving its highest ever 6-monthly turnover of $9.9m in H1’18 (+11% vs LY $8.9m - estimated split 11.4% Q1, 10.6% Q2), and encouragingly becoming EBITDA positive (Est $0.1m). Boosted by impressive performances from MIS (+27% to $4.0m) and Direct (+22% to $2.8m - transportation & logistics), alongside favourable operating leverage.
Elsewhere, two important system integrations were completed in the period to enhance CLSU’s offering and routes-to-market. Namely ClearMD, with the 3 largest US drug laboratories (Re Abbott, LabCorp and Quest Diagnostics), enabling customers to choose from >9,500 testing sites across the country. And CLSU’s state-of-the-art ‘touchless’ mobile solution (including facial recognition) with SAP SucessFactors.
Shifting to the numbers, we have increased our valuation from 95p to 100p/share thanks to the better than expected H1 cash out-turn. Albeit at this stage, prudently retained the FY18 turnover and EBITDA forecasts of $19.9m and $0.5m respectively. 
Broadening of medical testing service
Published: Jun 20 2018

ClearStar (CLSU) is a leading technology provider to the multi $billion job screening (63% of $17.8m 2017 revenues, up 11% LFL) and drug/medical testing (37%) markets.
Momentum seems to be building. At the 22nd May trading update, CLSU announced that it had secured new work with the likes of Gulfstream Aerospace, Hilmar Cheese and BNSF Railway Company (a Berkshire Hathaway company). 
Then today came news that the firm had enhanced its medical services platform by integrating the ClearMD mobile drug testing solution with Abbott Laboratories, a leading global provider of healthcare diagnostics.This immediately increases the number of CLSU locations [to >9,500] where an employee/candidate can utilise ClearMD, particularly in rural areas. What’s more the agreement should also generate significant economies of scale (eg procurement), along with speeding up the whole service proposition.
CEO Robert Vale stating: 'We are very proud to have achieved this integration with Abbott Laboratories, which makes ClearStar the only provider of paperless medical testing with a fully customisable user platform that is integrated with all three major US labs'.
Although this agreement does not change our numbers or 95p/share valuation, we nevertheless believe the stock is significantly undervalued. Underpinned by CLSU’s technological expertise, ongoing buoyant demand, high repeat revenues and 90%+ retention rates.
Valuation rises to 95p/share
Published: May 22 2018

ClearStar (CLSU) is a leading technology provider to the multi $billion job screening (63% of $17.8m 2017 revenues, up 11% LFL) and drug/medical testing (37%) markets. Today it released a pleasing trading update ahead of its AGM.
Q1’18 sales were up >11% with momentum continuing into Q2. Driven primarily by the rollout of direct contracts (eg SIRVA) won in 2017 for background screening, and the increased adoption of MIS (eg Pacific Maritime) by channel partners. 
Furthermore, ClearStar has seen a step-up in interest (eg winning Gulfstream Aerospace & Hilmar Cheese in Q2) for its innovative ‘touchless’ solution that integrates with SAP SuccessFactors - adding another potentially major route to market. Whilst more broadly macro demand remains robust thanks to a buoyant US recruitment sector, growth of the ‘gig economy’, international expansion and tighter legislation with regards to illegal workers.
The balance sheet is in good shape too, with net cash set to close Dec’18 at $1.0m – which, together with a $5m undrawn borrowing facility, should provide ample headroom. Further out, we are pencilling in 2019 turnover and EBITDA of $22.3m and $1.6m, climbing to $44.3m and $11.3m (margin 25.6%) by 2025.
Consequently, we maintain our 2018 turnover and EBITDA estimates of $19.9m (+11.8%: split 11.2% H1 & 12.4% H2) and $0.5m respectively. 

Albeit we nudge up the valuation from 90p to 95p/share on the back of recent dollar strength (£:$ 1.36 vs 1.43 at time of prelims) and healthy visibility, underpinned by high retention rates and annuity-type revenues. 
An interview with management
Published: Apr 20 2018

Bob Vale, CEO, and David Pattillo, CFO, present the Group's financial and operational performance highlights for FY17 and lay out the plans for future growth.
Quality stock at rock-bottom price
Published: Apr 17 2018

Founded in 1995 and floated at 57p/share in July’14 (raising £8.8m gross), ClearStar (CLSU) is a leading technology provider to the multi $billion job screening (63% of $17.8m 2017 revenues, up 11% LFL) and drug/medical testing (37%) markets. The firm, head-quartered in Georgia (US), employs ~90 staff; and enjoys high retention rates of >90%, and excellent forward visibility reflecting the everyday, low-cost and often mandated nature of its products.
Warren Buffett, the ‘Sage of Omaha’, has spoken many wise words during his accomplished career. Not least that “markets can stay irrational for far longer” than one might expect - yet ultimately they’re “weighing machines”, so value wins out in the end. 
This is the predicament ClearStar currently finds itself in. Trading on a bargain basement 1.1x 2018 EV/revenues vs 4.2x for the broader credit checking/SaaS sector. A point not missed either by respected fund manager Hargreave Hale (part of Canaccord Genuity), which has doubled its stake to 14.5% over the past 12 months. 
The good news is that the underlying business is motoring along nicely, and should turn EBITDA positive (vs -$0.4m) in 2018 on sales of $19.9m (+11.8%). Moreover, this assumes £2m of R&D spend (or 10% of revenues), reflecting CLSU’s award winning technology, particularly in mobile, facial recognition and GDPR compliance. Double digit top line growth was achieved in 2017, even after absorbing the impact of Hurricanes Harvey and Irma. Posting turnover up 11% LFL (12% H1: 10% H2) to $17.8m (vs $16.0m LY) and net cash closing December at $1.24m ($2.25m). 
In summary, therefore, today’s results are consistent with our investment thesis - reiterating the $19.9m 2018 turnover target, albeit trimming EBITDA from $0.9m to $0.5m after factoring in a slight increase in R&D and lower gross margins. However, this should be viewed simply as a temporary bump when considering the long term picture. Further out, we are pencilling in 2019 turnover and EBITDA of $22.3m and $1.6m respectively, climbing to $44.3m and $11.3m (margin 25.6%) by 2025.
Underpinned by numerous macro tailwinds, such as the favourable US economic backdrop for hiring, shift towards the ‘gig economy’, Federal measures to combat crime and the greater adoption of pre/post-employment medical screening (re health & safety). Indeed, with >90% of sales derived from ongoing ‘repeat’ work – eliciting EBITDA drop through rates 40%+ - then patience should be rewarded in due course. 
Looking ahead, we are pencilling in 2019 turnover and EBITDA of $22.3m and $1.6m respectively, climbing to $44.3m and $11.3m (margin 25.6%) by 2025. The shares appear fundamentally mis-priced at 45p versus our 90p/share valuation.
Medical and direct sales powering growth
Published: Jan 11 2018

ClearStar is a leading technology provider to the multi $billion job screening (62% of 2016 sales) and drug/medical testing (38%) markets. The firm, head-quartered in Georgia (US), employs about 90 staff; and in 20176 conducted 7.8m screens (+8% YoY) on >2.3m individuals across >20k businesses, delivering turnover of $16m (~95% US).
Despite the unwelcome impact of Hurricanes Harvey and Irma in its backyard states of Florida, Georgia, South Carolina and Texas, ClearStar nonetheless reported impressive 2017 trading yesterday. Bang in line with our pre-storm estimates (from July), with revenues up 11% LFL (split 12% H1: 10% H2) to $17.8m (vs $16.0m LY) and net cash closing December at $1m (vs $1.5m June and $2.25m LY). 
Growth is being driven by buoyant demand for direct screening (+21%) and medical/drug testing (+20%) services. The latter now (including channel partners) accounting for 38% (35% LY) of revenues, with the former equally set to climb from 24% in 2016 to >50% by 2024.
Going forward, we make no change to our numbers, and believe the company will continue to benefit from favourable macro tailwinds. Namely a positive US employment picture, shift towards the hiring of ‘casual/temporary’ labour, government crackdowns on illegal workers and the greater adoption of pre/post-employment medical screening (re health & safety). Especially in light of the US’ ongoing fight again opioids, and recent legalisation of some recreational drugs, such as Marijuana in California (from 1st January 2018).
Importantly too, 90% of turnover relates to ‘repeat’ everyday business – delivering retention and EBITDA drop through rates of 90% and 40%+ respectively.
To us the stock looks lowly rated, trading on a frugal 1.1x 2018 EV/sales multiple, particularly given the double-digit organic growth, resilient business model and annuity type income streams. Indeed, for 2018 we are pencilling in EBITDA of $0.9m on turnover of $19.8m. 

Our DCF valuation comes out at 90p/share, and in due course the stock could trade at not too dis-similar levels to other software, SaaS and credit check peers.
Investor Forum September 2017
Published: Sep 25 2017

Robert Vale presents at the Equity Development September Forum
12% LFL growth drives record H1 sales
Published: Sep 19 2017

ClearStar (CLSU) is a leading technology provider to the multi $billion job screening (65% of 2016 sales) and drug/medical testing (35%) markets. The firm, head-quartered in Georgia (US), employs ~90 staff; and in 2016 conducted 7.8m screens (+8% YoY) on >2.3m individuals across >20k businesses, delivering turnover of $16m (~95% US). 
Circa 90% of turnover relates to ‘repeat’ everyday background/employment and drug/alcohol screening tests (run-rate >8m pa). Better still, retention is an impressive 90% - which when added to the natural flow through of recently signed deals, the ‘on-boarding’ of existing clients, and today’s ‘bang in line’ interims – means there is >95% and >85% respectively of revenue cover for this year ($17.8m) and next ($19.8m). 
This top line predictability brings with it 40%+ EBITDA drop through rates, which should propel the company into the black in H2’18, along with being cashflow positive. Consequently to us, trading on a modest 1.3x CY EV/sales, the stock looks cheap, and should (in theory at least) respond favourably, as more investors begin to appreciate the double-digit organic growth, positive operating leverage, scalable business model and annuity type income. Rare qualities indeed in an increasingly uncertain world. 
For the 6 months ending June, turnover was up 12% LFL to a record $8.9m (vs $8.0m H1’16 and $8.1m H2’17) with EBITDA losses declining 20% to -$165k (vs $208k LY). Divisionally, Direct H1 revenues jumped 20% to $2.3m reflecting buoyant conditions in transportation (eg UniGroup) and domiciliary care, while Medical Information Services (MIS) climbed 15% to $3.1m helped by the roll-out of the blue ribbon Intellicentrics contract, secured in Mar’17. 
In 2018, we are pencilling in EBITDA of $0.9m on turnover of $19.8m - rising to $22.1m and $1.9m in 2019, and $43.5m and $11.0m (margin 25%) by 2025 (see below). Our DCF analysis values the stock at 90p/share, using a range of multiples, discounting back at 12% and adjusting for cash.

NB CLSU management are presenting at the ED Forum this Wednesday evening, 20th Sept, register here to meet them:
Booming gig economy driving growth
Published: Jul 12 2017

Founded in 1995 and floated at 57p/share in July’14 (raising £8.8m gross), ClearStar (CLSU) is a leading technology provider to the multi $billion job screening (65% of 2016 sales) and drug/medical testing (35%) industries. The firm, head-quartered in Georgia (US), employs ~90 staff; and in 2016 conducted 7.8m screens (+8% YoY) on >2.3m individuals across >20k businesses, delivering turnover of $16m (~95% US). 
What if it was possible to find a company, expanding at >10% pa, yet trading at a mere 1.1x EV/sales vs 2x-4x for the wider sector. Interested? I was too upon coming across ClearStar Inc. A little-known £16m market cap stock, providing automated job screening and alcohol/drug testing services. Areas enjoying buoyant demand from the rise of the high profile ‘gig’ economy (Uber/Deliveroo), government clampdowns on illegal workers and ongoing healthy employment levels.
Although competing against some pretty serious players – namely First Advantage, HireRight and Sterling Talent Solutions – ClearStar is nonetheless gaining market share, and is set to achieve a maiden EBITDA profit in H2’17, and be slightly cashflow positive 12 months later.
The Board said today that turnover had climbed to a record $8.9m (+12%) in H1 (all organic) vs $8.0m H1’16 and $8.1m H2’17 – thanks to a standout performance from Direct (transportation & home healthcare), augmented by double digit growth in medical/drug testing and a stabilisation of Singlesource’s client base (acquired mid Dec’14 for $4m).  What’s more, growth accelerated sequentially from Q1 (+10.5%) to Q2 (+13%), compared to the broader US screening sector, which we understand is ticking along at a much slower 2%-5% pace.
Looking ahead, we reckon this momentum will be maintained into H2 and beyond, with the Board “confident of achieving strong full-year revenue (ED est. $17.8m up 11% vs $16m LY) in line with market expectations.” Indeed, 2017 is anticipated be a watershed year, with CLSU achieving a small maiden EBITDA profit in H2 - and then become cash flow positive towards the end of 2018 on turnover of $19.8m. Thereafter, we are pencilling in 2019 revenues and adjusted EBIT of $22m and $0.6m respectively, climbing to $43.7m and $8.4m (margin 19.2%) by 2025.
We think CLSU deserves to trade on a rating not too dissimilar with the ‘SaaS’ (software as a service) sector, given its top-notch technology, low churn, recurring revenues and scalable business model. Moreover, our DCF analysis implies that the stock is worth 90p/share when using a range of 2025 multiples, discounting back at 12% and adjusting for cash.