There are few principles in life that work consistently through ‘thick and thin’. One of the most important (& usually hardest to find) for investors is purchasing ‘quality growth stocks at attractive prices’. Enter ClearStar, who this morning (ahead of its AGM) 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 encouragingly it is up sequentially from 11% in Q1’19. Meaning that the last 2 months must have expanded by c. 17%, with Chairman Barney Quinn adding that May had been a record month.
Here momentum is being driven by the on-boarding of previously secured clients, new contract wins and up/X-selling within the Direct & Medical Information Services (MIS) divisions. Together representing around 70% of the group, and increasing at approx. 30% pa.
Better still, investments in the sales team, alongside greater brand recognition have led to a much larger pipeline (Q1’19 RFPs were twice those in the whole of 2018) and improved bid conversion. Plus most (if not all) of ClearStar’s turnover is repeat/recurring in nature, providing robust visibility coupled with hefty EBITDA drop through rates.
In terms of the numbers, 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. Hence 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. Moreover 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.