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.