Medical and direct sales powering growth
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.
ClearStar is a technology and service provider engaged in the services to the background check industry, supporting background screening companies, employers and employees with their recruitment and employment application decisions. Co. provides employment intelligence to its clients through a suite of IT applications for day-to-day use in their business.
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