ClearStar Inc

http://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.

LATEST REPORTS

 
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:  
https://www.eventbrite.co.uk/e/equity-development-investor-forum-september-2017-tickets-37192632164?ref=ebtn
 
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.

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