Trying to guess where the FTSE will be in 6-12 months is a bit of a crapshoot. Not so for ClearStar, where 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).
Importantly, 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 (see below), 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.
The only minor irritation is ‘stock availability’. Management, however, are fully aware of the problem, and decided a fortnight ago to merge the two tickers into one (CLSU) – with the aim of improving liquidity, especially once the new tradable certificates have been issued to the CLST restricted shareholders.
Further out, the company could even become an M&A target, which briefly happened in May 2016. In this case the tentative approach was rejected by the Board, albeit in light of past sector consolidation we would not be too surprised to see CLSU ultimately being snapped up by a larger rival - who could probably generate a hat-full of synergies, and hence afford to pay a handsome control premium to boot.