Join our community of smart investors
OPINION

Cleaning up

Cleaning up
October 13, 2015
Cleaning up

In fact, analysts Michael Cabaday and Keith Redpath at broking house finnCap raised their target price (from 90p to 110p) and fiscal 2016 pre-tax profit estimates by 12 per cent to £2.9m post the announcement. But that only brings the brokerage into line with what I had expected before the announcement and I feel they are still behind the curve. A more meaningful analysis comes from analysts Gilbert Ellacombe and Paul Hill of research firm Equity Development who lifted their fair value target price from 110p to 135p based on solid valuation techniques.

I am inclined to side with them for a number of reasons, implying Tristel's share price has further to run even after producing a total return of 100 per cent including dividends since I began coverage ('Clean up on superbugs', 6 May 2014). That's because there is potential for sales momentum - underlying revenues increased by 13.8 per cent to £15.3m in the 12 months to end June 2015 - to accelerate as the company taps into further overseas markets.

To give you some idea of the current growth rate, international revenue accounted for 35 per cent of the total in the 12-month period, having risen from 32.5 per cent in the first half to over 39 per cent in the six months to end June 2015. So as Tristel enters new markets - the company is currently in the process of obtaining regulatory approval to sell its products in the United States - then expect the proportion of overseas revenue to grow too. To put this into perspective, Equity Development conservatively estimate the split between domestic and international sales could be almost 50:50 by 2019 based on revenues hitting £26.8m, up from £15.3m in the year just ended. On that basis, expect fiscal 2019 pre-tax profits of £5.4m, or more than double the fiscal 2015 outcome, to generate normalised EPS of almost 10p.

 

Operational gearing drives profitability

Moreover, with a high proportion of repeat orders, then the greater geographic spread will result in a growing recurring revenue stream too. There is also the operational gearing effect of rising revenues on a largely fixed cost base which results in a greater level of profitability being earned on incremental sales. This explains why Tristel's operating margins in the latest 12 month period shot up by almost three percentage points to 16.5 per cent and resulted in operating profit rising by 40 per cent to £2.5m on revenues up 13 per cent to £15.3m. For the current fiscal year, Equity Development predicts a 15 per cent increase in revenues to propel pre-tax profits and adjusted EPS up by almost a fifth to £2.95m and 5.89p, respectively.

It goes without saying that maintaining growth in Tristel's high-margin and patented chlorine dioxide technology infection control healthcare products, accounting for 85 per cent of sales, is critical in hitting those forecasts. But with the technology protected under long-term patents, barriers to entry high, and demand well underpinned by the need for hospitals to decontaminate medical instruments and surfaces to guard against superbugs, then I see no reason why the company shouldn't be able to continue to generate 15 per cent plus annual revenue growth as it has done so over the past decade.

 

Positive shareholder returns

That's not just good news for profits, but for shareholders who are being rewarded with their fair share of these profits too. Tristel's normal dividend was raised by two thirds to 2.7p in the latest 12-month period, better than I had anticipated, and that excludes a special payout of 3p a share made in June. So given the robust cash generation of the business, and the board's stated aim of targeting a pay-out twice covered by net earnings, then expect further growth in the dividend in the future.

The combination of patented protected technology, an exciting new product pipeline, planned entry into new markets, high cash generation, an attractive dividend policy, reasonable PEG ratio of one, and a rating below peers points towards further share price upside in my view. Trading 6 per cent below the healthcare sector average rating of 16.6 for fiscal 2016 (based on enterprise value to operating profit multiple), and offering a forward normal dividend yield of 2.3 per cent, I see scope for Tristel's share price to continue its run to bring the rating into line with peers. The company is also a potential bid target for a much larger rival attracted by the heady growth rate in the business.

Trading on a bid-offer spread of 120p to 123p, I would run profits and have a new target price of 130pto 135p.

Please note that I have written four articles today and links to the others are included in the list of my articles below.

MORE FROM SIMON THOMPSON...

I have published articles on the following companies in the past three weeks:

Trakm8: Run profits at 195p, target 220p; Character Group: Run profits at 518p, target 575p; Marwyn Value Investors: Buy at 220p; Global Energy Development: Speculative buy at 30p; Software Radio Technology: Buy at 27p, target range 40p to 43p; Globo: Buy at 33p, target 69p; Pittards: Hold at 105p ('Cashed up for cash returns, 22 Sep 2015).

KBC Advanced Technologies: Buy at 112p, initial target 142p; K3 Business Technology: Run profits at 298p; Cenkos Securities: Buy at 177p; Netplay TV: Buy at 10p ('Small cap value plays', 23 Sep 2015).

Miton: Buy at 26.5p, target 35p; 32Red: Buy at 73.75p, target 90p; Stanley Gibbons: Buy at 138p; Vislink: Buy at 40p, target 70p ('Building momentum', 29 Sep 2015)

Moss Bros: Buy at 97p, target 120p; GLI Finance: Buy at 52p, target 80p; Town Centre Securities: Buy at 315p, target 350p; Globo: Buy at 39p, target 69p ('Platforms for success', 30 September 2015)

Safestyle: Run profits at 255p; Epwin: Run profits at 138p; Manx Telecom: Buy at 188p, target 210p ('Income plays with capital upside', 1 October 2015)

LXB Retail Properties: Buy at 86p, target 99p ('Bag a retail property bargain', 5 October 2015)

Creston: Run profits at 162p, target 171p; Fairpoint: Run profits at 184p, new target range 200p to 220p; Trifast: Buy at 114p, target 140p; 600 Group: Buy at 16p, target 24p; Renew Holdings: Buy at 315p, target range 350p to 375p; Stanley Gibbons: Hold at 105p ('Engineering ratings upgrades', 6 October 2015)

STM Group: Buy at 71p, target 80p ('Riding small cap winners', 7 October 2015)

First Property Group: Buy at 39.5p, target 49p ('In pole position for re-rating', 7 October 2015)

Tristel: Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)

Equity market strategy ('Bull market pointers', 8 October 2015)

Gresham House: Buy at 320p, target 450p ('A mandate for strong growth', 12 October 2015)

Tristel: Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)

AB Dynamics: Run profits at 267p ('Under-promising, over delivering', 13 October 2015)

Trakm8: Run profits at 245p ('Motoring ahead', 13 October 2015)

PROACTIS: Buy at 102p, target 130p ('Secured growth for re-rating', 13 October 2015)

■ Simon Thompson's book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 and is being sold through no other source. It is priced at £14.99, plus £2.95 postage and packaging. Simon has published an article outlining the content: 'Secrets to successful stockpicking'