Recovering faster than anticipated
Price can often be a poor indicator of value, especially during uncertain times & for smallcap stocks. So it is for specialist US background screening & medical testing firm ClearStar. Indeed despite the shares dropping on low volume, the company has actually traded much better than we had previously thought possible.Not only “experiencing a significant uptick in sales from the end of May, which has continued into Julyâ€. But also generating positive EBITDA (pre SBPs) between May & June, along with being largely cashflow neutral – net debt coming in at $1.4m on 30th June (liquidity $2.2m) vs $1.5m 15th June & $1.0m 5th May 2020.
Through the worst of the pandemic
Promising news, particularly given America has just experienced its steepest decline in employment ever. Moreover, regardless of the recent rise in Covid infections as businesses reopen, progress towards finding an effective medical solution – eg vaccine (Moderna, Oxford Uni/AstraZeneca, J&J, Pfizer) &/or therapeutic (Regeneron) – is progressing at speed.
Meaning that many of the 20.7m jobs lost (see below, non-farm payrolls) in April, or equivalent to 10.3% of the workforce, should be return over the next 12–24 months.
June sales rebound to February levels
In fact, this is already happening, with CLSU’s June turnover jumping 74% vs April, equivalent to February levels. Driven by financial institutions (eg Wall Street investment bank), an HR outsourcing group (NYSE listed, $2.6bn mrkcap) and greater demand for medical testing (MIS).
What’s more, in the absence of another round of widespread ‘stay at home orders’ – which we don’t think will occur, or is necessary – then coupled with tight cost control, these favourable trends should continue throughout H2 & beyond.
Lastly with regards to valuation, the shares (at 33p) trade on a modest 2019 EV/revs of 0.7x vs peers (pre coronavirus) at 2.5x–3.5x. We believe this ratings gap is unjustified & will close over the next 1-2 years, as Clearstar delivers strong top line growth - complemented by improved operational gearing, reflecting cost savings that should ensure post-pandemic.
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