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Organic growth is accelerating, and quickly

Surefire winners don’t exist in the real world. However in the smallcap space, we think Clearstar is a pretty close alternative. Its two main growth engines – Medical Information Services (MIS) and Direct – are expanding at around 30% pa, and now represent circa 70% of the group. This is hugely encouraging, because as the company scales, a greater proportion of incremental turnover should fall straight to the bottom line.
Granted, Clearstar is currently investing in brand awareness and its in-house sales team, yet once these initiatives have fully taken effect, then we expect to see a material uptick in profits and even overall organic growth, as the declining 3rd-party channel revenues become less significant.
In terms of today’s ‘on track’ AGM statement, the company 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 importantly it is up sequentially from 11% Q1’19. Meaning that the last 2 months must have increased by c. 17%, with Chairman Barney Quinn adding that May had been a record month. Driven by the on-boarding of previously secured clients, new contract wins and up/X-selling within MIS & Direct.
Hence, 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. 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) – ie say in the event of a ‘hard’ Brexit.
Chairman Barney Quinn, concluding: “Looking ahead, we continue to focus our efforts on business sectors with a transient workforce – or the ‘gig economy’; where there is a high demand for screening to meet industry regulations; or where a worker is entering the home, such as home healthcare. Through sustained sales & marketing efforts, we are receiving greater interest from potential customers than ever before, which we are increasingly converting to sales. As a result, we are on track to achieve strong growth for full year 2019, in line with market expectations.”