Quality stock at rock-bottom price
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 machinesâ€, 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.
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.
Equifax Inc. is a provider of information solutions and human resources business process outsourcing services for businesses, governments and consumers. The company's services are based on databases of consumer and business information. The company uses statistical techniques, machine learning and proprietary software tools to analyze all available data, creating insights, decision-making solutions and processing services for its clients. The company also provides information, technology and services to support debt collections and recovery management. Additionally, the company provides payroll-related and human resource management business process outsourcing services in the United States of America.
International Business Machines provides integrated solutions and products that utilize data, information technology, capability in industries and business processes. The company has five segments: Cloud and Cognitive Software, which provides a range of software offerings; Global Business Services, which provides consulting, systems integration, application management and business process outsourcing services; Global Technology Services, which provides project services, managed and outsourcing services, cloud-delivered services, and technical and IT support services; Systems, which provides technology and service; and Global Financing, which provides client financing, among others.
Equity Development enables companies to become better understood and supported by investors. Since our launch in 1996 we have consistently focused on helping our clients improve their communication and relationships with both existing and potential shareholders. Our clients have come from a wide variety of sectors and domiciles, are both private and quoted and range in size from micro-cap to $multi-billions. We offer free access to company research notes written by experienced analysts. These notes include detailed forecasts, financial models and a fair value. We host regular Private Investor Forums at which investors have the opportunity to hear company directors present, and to ask questions. These are free to attend. We broadcast live Webinars with company management that include active Q&A. We also make the recordings available online. We arrange face to face meetings between private investors and company management. We are active users of Twitter, commenting daily on company news, share price moves, Directors’ Dealings, Equity Development Research Notes & Events.
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