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.