ClearStar, Inc. is a leading and trusted background check technology, strategic services, and decision-making information provider to employers and background screening companies.
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 July”. 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.Download Now Missing Out Get our research first
Robert Vale of ClearStar Inc Interview June 20
Robert Vale, CEO of ClearStar Inc, discusses how the business has fared during the COVID pandemic following years of organic double digit growth, and how green shoots in the US economy bode well for a rehiring surge.
Bouncing back quicker than anticipated
Ahead of ClearStar’s AGM, Chairman Barney Quinn today reported : “While it remains too early to estimate the impact of COVID-19 on full year 2020, we are increasingly optimistic that it will not be as bad as we once feared.’’
Although America lost 20.7m jobs in April, equivalent to 15.5% of the workforce, the good news is that green shoots are already starting to appear. Not least with May’s non-farm payrolls figure coming in at +2.5m gain (13.3% unemployment rate) vs an estimated decline of 8m. The Federal Reserve see a rebound in economic activity (+5.0% in 2021). Such an outcome should provide a supportive backdrop for US background screening & medical testing expert ClearStar, as a net 10m+ jobs are created over the next 2.5 years (average 330k/month).
In terms of employee CV19 testing we understand the US Government has temporarily delayed the start of all new operations of this type, in order to ensure there is consistency nationwide. When the industry gets Federal authorisations, ClearStar has already been awarded 5 deals, which should provide a further lift to the top line.
With regards to valuation, the shares (at 38p) trade on a modest 2019 EV/revs of 0.8x vs peers (pre coronavirus) at 2.5x – 3.5xDownload Now Missing Out Get our research first
CEO discusses new COVID-19 testing service for workplace
Robert Vale, CEO and co-founder of ClearStar, explains the significance of this week’s announcement on how they can help accelerate a safe return to work for many of the millions who have recently lost their jobs in the USA.That news sent the shares soaring, and he also covers the recent FY19 results.
New COVID-19 workplace testing service
Today came the momentous news that there is now a workplace test for COVID-19 available to all American businesses, freelancers, ‘gig’ workers &/or sole traders. This new tech-enabled solution is powered by ClearStar’s ClearContact, ClearID and Virtual Badge (strategic partnerships) applications, in conjunction with Clinical Reference Laboratory’s (CRL) expertise in blood/antibody & saliva tests.
The kits will be shipped either in bulk to the employer or direct to the employee (or job applicant), with the samples being returned to CRL for analysis. After which the results should be available within 24 hours - a substantial improvement on the timescales that currently exist.
Although it is impossible at this stage to put any concrete numbers on the opportunity, we understand that CLSU performs c. 7,000 medical screens per month. So at a price point of say between $100-$175 / unit, the solution (once fully rolled out) hypothetically might generate incremental revenues of between $0.5m-$1.0m/month.
Furthermore, almost all 50 US states are now beginning to gradually remove stay-at-home orders and reboot their regional economies. Meaning that, at some point, there is likely to be the ‘mother-of-all-rehiring’ sprees after the recent loss of 36m jobs.
Lastly, in terms of valuation the shares (at 41p) trade on a modest 2019 EV/revs of 0.8x vs peers (pre coronavirus) at 2.5x – 3.5x.
H2 demand surge anticipated as US reopens
2019 results were in line with our revised expectations - reporting adjusted EBITDA (post SBPs) of $370k (-$108k LY) on turnover up 14% LFL to £23.0m ($20.1m). Driven by strong top line growth from Medical (+21%, MIS) & Direct (+32%), together climbing 26% to $16.5m (72% of group).
ClearStar also traded well up to February, although from mid-March onwards lockdowns began and corporate America shed millions of staff: leading to a loss of >30m jobs nationally. Equally the big 3 diagnostic laboratories (ie Quest, Lab Corp & Abbott) have since prioritised resource on COVID-19. Making it difficult for MIS to obtain capacity for its leading drug & alcohol services.
Even if the waters remain choppy for longer than predicted, we estimate ClearStar has sufficient liquidity to weather this transitory storm. Supported by gross cash as at 5th May of $3.8m ($1m net debt), after receiving a 2 year $1.1m loan (1% interest rate) under the Paycheck Protection Program (PPP).
These are uncertain times and therefore we have decided to withdraw our forecasts and valuation until there’s greater clarity. Currently the stock is attractively priced for patient risk tolerant investors - trading on a trailing EV/Sales multiple of 0.8x compared to typical industry multiples pre COVID-19 crisis of between 2.5x – 3.5x.
The coronavirus will impact 2020 numbers, yet ultimately we believe the group will prosper.Download Now Missing Out Get our research first
Deeply undervalued, high growth stock
Brief lull in financial screening volumes
Interim results interview September 2019
Clinically proven to deliver faster growth
Shooting the lights out
Organic growth surges further ahead
Organic growth is accelerating, and quickly
Surefire winners donâ€™t exist in the real world. However in the smallcap space, we think Clearstar is a pretty close alternative. Its two main growth engines â€“ Medical Information Services (MIS) and Direct â€“ 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 todayâ€™s â€˜on trackâ€™ 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% in Q1â€™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 â€“ 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. Plus with approx 95% of revenues in dollars, thereâ€™s a natural hedge too for UK investors against further currency depreciation (Â£:$1.25), say in the event of a â€˜hardâ€™ Brexit.
Chairman Barney Quinn, concluding: â€œLooking ahead, we continue to focus our efforts on business sectors with a transient workforce â€“ or the â€˜gig economyâ€™; 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.â€