Having first advised buying the share at 60p ('Clean up on superbugs', 6 May 2014), I updated the recommendation on no fewer than seven occasions last year:
■ Buy at 82p, target 100p (‘Riding bumper profits’, 26 February 2015)
■ Run profits at 96p ('Hitting target prices', 2 June 2015)
■ Run profits at 92p ('Blue sky potential', 10 June 2015)
■ Run profits at 95p, target return to 110p ('Small caps priced for gains', 10 September 2015).
■ Run profits at 99p, target 110p ('Cleaning up with superbug buster', 7 October 2015)
■ Run profits at 123p, new target 130p to 135p ('Cleaning up', 13 October 2015)
■ Run profits at 142p ('Running small cap winners', 25 November 2015)
It’s clearly paid off as the shares closed at an all-time high of 145.5p yesterday, having hit an an intraday high of 148p, ahead of today’s half year results. The fact that the price has fallen by 13 per cent to a bid-offer spread of 125p to 127p post the announcement is noteworthy, and reflects a number of factors worth commenting on.
Firstly, revenues in the half year period rose 8 per cent to a record £8m, to lift pre-tax profits before share-based payments by 36 per cent to £1.5m, but there is clear evidence of saturation in the UK market. Indeed, chairman Francisco Soler points out that: “Our clearest challenge at this point in our development is to counteract the anticipated slowing of sales growth in the United Kingdom. We will achieve this through a combination of targeting more rapid growth in overseas markets and a steady pipeline of new product launches. Slowing growth in the United Kingdom is due to the very high levels of market penetration that we have achieved in the clinical areas of the hospital that we target.” It’s worth noting too that the company has started a programme to cull lower margin products which do not incorporate Tristel’s patented chlorine dioxide chemistry. This will acerbate the sales slowdown.
The contrast between sales in the home market and overseas is striking. In the home market revenues edged up by only 2 per cent to £5.1m, whereas international revenue increased by 20 per cent to £2.9m. On a divisional basis, UK healthcare sales actually declined by almost 2 per cent to £4.15m which is a concern.
So, although there is every reason to expect Tristel to continue to grow its overseas sales, analysts have reined in their revenue expectations overall. Having previously factored in top-line growth of 15 per cent per annum over the next few years, analysts Hannah Crowe and Paul Hill at equity research firm Equity Development now forecast a blended rate of between 7 to 9 per cent. That’s not to say that their profit expectations have altered. They haven’t. That’s because as the business scales up, and the international segment becomes a greater part of the mix, they predict operating profit margins will rise from around 18 per cent to “an industry norm in excess of 20 per cent”.
As a result, Equity Development are maintaining pre-tax profit estimates at £2.9m and £3.3m for the current financial year (ending 30 June 2016), and the following year. On this basis, expect adjusted EPS of 5.7p, rising to 6.2p in the 2017 financial year, which should underpin respective dividend estimates of 2.85p a share and 3.11p a share. And with cash generation robust – net funds ended the period at £4.3m, or the equivalent of 10p a share, up from £4m last June – there is every reason to expect the board to maintain its prospective dividend policy.
Fully valued
However, it wasn’t just the ability of the company to return cash back to shareholders that appealed to me, but its ability to maintain a 10 per cent plus growth rate in its revenues to drive profits higher and maintain an earnings upgrade cycle that I have been riding. Indeed, the reason why the company booked a £1m charge for share based payments in today’s results is due to the fact that the share price has risen sharply on the back of this earnings cycle. But the deceleration in sales growth probably marks the end of the upgrade cycle.
The fact that the UK market has stalled also means that there is now an over reliance on overseas sales to generate growth at a juncture when the company is increasing investment in expanding into new territories, such as the US. Of course, upside from a potential entry into the North American market is not embedded into analysts forecasts, but I still feel that the risk:reward ratio has shifted, and unfavourably so and I can no longer maintain my positive stance.
In fact, rated on a cash adjusted PE ratio of almost 20 for the current financial year, I believe that Tristel’s shares are fully priced based on current trading trends. I am not the only one thinking this way as Equity Development has trimmed back its target price this morning from 140p to 125p, reflecting a more conservative sales trajectory, and brokerage finnCap believes fair value is nearer 110p.
In the circumstances, I would recommend crystallising the thumping 100 per cent plus paper profit on your holdings. Take profits.
Please note that I have published three columns today, all of which are available on my IC homepage and are listed below.
MORE FROM SIMON THOMPSON...
I have written articles on the following 78 companies since the start of this year:
■ Grainger: Buy at 243.5p, target 280p; Dart: Take profits at 580p; Crystal Amber: Hold at 159p; Redde: Take profits at 203p; Burford Capital: Run profits at 196.5p; Renew: Run profits at 404p; Plethora Solutions: Speculative buy at 4.5p ('Stock check', 5 Jan 2016)
■ Elegant Hotels: Buy at 118p, target price 130p to 135p ('Check in for a profitable stay', 6 Jan 2016)
■ Safestyle: Run profits at 272p ahead of pre-close statement on 25 Jan 2016 ('Clear cut gains', 6 Jan 2016)
■ Epwin: Run profits at 143p, new target 170p ('Epwin on the acquisition trail', 6 Jan 2016)
■ GLI Finance: Recovery buy at 37.5p ('GLI shelves fundraise and its chief executive', 6 Jan 2016)
■ LXB Retail Properties: Buy at 97.5p, new six-month target 120p; Urban&Civic: Buy at 286.5p, target 325p; Conygar: Buy at 172p, target 200p ('Hot property, 7 Jan 2015)
■ Somero Enterprises: Buy at 139p, target 185p; 1pm: Buy at 70p, target 82p; First Property: Run profits at 53p; Avation: Buy at 145p, target 200p ('Small-cap value plays', 11 Jan 2016)
■ 32Red: Run profits at 147p; Netplay TV: Buy at 7p ('Chipping in', 12 Jan 2016)
■ Cambria Automobiles: Buy at 87p, new target 95p; Vertu Motors: Buy at 76p, target range 85p to 90p ('Motoring ahead', 12 Jan 2016)
■ Global Energy Development: Hold at 24p ('Cash rich, but unloved', 12 Jan 2016)
■ KBC Advanced Technologies: Bank profits and sell in the market at 183p ('Tech watch, 13 Jan 2015)
■ Sanderson: Buy at 75p, target range 85p to 90p ('Tech watch, 13 Jan 2015)
■ Trakm8: Buy at 300p, new target 400p ('Tech watch, 13 Jan 2015)
■ Amino Technologies: Buy at 120p, new target range 155p to 160p ('Amino has the ammunition', 14 Jan 2015)
■ easyHotels: Buy at 89p, initial target 100p ('easyHotels ramps up expansion', 14 Jan 2015)
■ Stanley Gibbons: Hold at 58p ('Stanley Gibbons fundraise', 14 Jan 2015)
■ Miton: Buy at 28p, target 35p; Moss Bros: Buy at 97p, target 120p to 130p; Bioquell: Buy at 140p, minimum target 170p; UTV Media: Trading buy at 184p ('An awesome foursome', 18 Jan 2015)
■ Equity market strategy ('Bear Market signals', 25 Jan 2015)
■ STM: Buy at 47p, target 80p; Stadium: Trading buy at 103p; Fairpoint: Run profits at 150p, target range 200p to 220p ('Exploiting market anomalies', 1 Feb 2015)
■ Character: Buy at 505p, target 600p; 1pm: Buy at 67p, target 82p; and Entu: Hold at 68p ('A trio of small cap plays', 2 Feb 2016)
■ Inland: Buy at 83p; Henry Boot: Buy at 220p, target 260p; FTSE 350 housebuilding sector: Trading buy ('Playing the housing market', 3 Feb 2016)
■ Flowtech Fluidpower: Buy at 109p ('Undervalued and ripe for a re-rating', 4 Feb 2016)
■ Safestyle: Run profits at 253p ('Awaiting news on a cash return', 4 Feb 2016)
■ Bowleven; Volvere; French Connection; Bioquell; Juridica; Mind + Machines; Oakley Capital; Gresham House; Gresham House Strategic; Walker Crips ('Bargain shares', 4 Feb 2016)
■ AB Dynamics; Inspired Capital; H&T; Netplay TV; Mountview Estates; Crystal Amber; Arbuthnot Banking; Record; Pittards; Stanley Gibbons ('How the 2015 Bargain share portfolio fared', 4 Feb 2016)
■ IS Solutions: Buy at 120p, target 150p ('Big data, big profits', 8 February 2016)
■ 32Red: Run profits at 133p, easyHotel: Run profits at 99p; Burford Capital: Run profits at 230p; Bilby: Buy at 136.5p ('Hitting record highs', 9 February 2016)
■ BP Marsh & Partners : Buy at 157p, new target 190p ('Primed for investment gains', 10 February 2016)
■ Gama Aviation: Hold at 270p ('Gama hits guidance', 10 February 2016)
■ Bloomsbury Publishing: Buy at 150p, target range 175p to 185p ('Book into a trading play', 11 February 2016)
■ PV Crystalox Solar: Speculative buy at 8.2p ('Lights brighten at PV Crystalox Solar', 11 February 2016)
■ Alpha Real Trust: Buy at 80p, target 105p ('High yield property play', 15 February 2016)
■ LMS Capital: Buy at 68p; Leaf Clean Energy: Await news on Invenergy; Eurovestech: Sell at 7p (‘Investment company watch’, 16 February 2016)
■ GLI Finance: Buy at 31p (‘GLI Finance review offers potential for gains’, 17 February 2016)
■ Trifast: Buy at 112p, target 140p (‘Engineered for a higher rating’, 17 February 2016)
■ 600 Group: Sell at 10p ('600 Group warns', 17 February 2016)
■ Marwyn Value Investors: Buy at 190p (‘Undervalued, cash rich investment, 18 February 2016)
■ Henry Boot: Buy at 220p; Moss Bros: Buy at 102p, target range 120p to 130p; Creston: Sell at 103p; Minds + Machines: Buy at 8.5p ('Changing places', 22 February 2016)
■ CareTech: Buy at 245p, target price 300p ('Asset backed, lowly rated property play', 23 February 2016)
■ WH Ireland: Buy at 90p, medium-term target 120p ('WH Ireland hit by FCA fine', 23 February 2016)
■ Stanley Gibbons: Sell at 44p ('Stanley Gibbons rescue equity raise', 23 February 2016)
■ Gresham House: Buy at 325p ('Gresham House spruces up forestry deal', 24 February 2016)
■ Avation: Buy at 140p ('Aircraft deliveries mask Avation’s lift off', 24 February 2016)
■ Tristel: Take profits at 125p ('Investors spooked by bugbuster's sales slowdown', 24 February 2016)
■ 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
