Tristel at a valuation crossroads

After an operationally challenging pandemic – in which sales teams were prevented from visiting hospitals, outpatient departments were emptied, and purchase orders turned lumpy – disinfection products specialist Tristel (TSTL) is hoping to wipe the slate (as well as diagnostic equipment) clean.

“For the first time in eighteen months, we are confident that our normal predictable pattern of business has resumed,” says chief executive Paul Swinney. Investors did not share his optimism, pushing the somewhat illiquid stock down 5 per cent on the publication of full-year numbers.

A couple of details likely explain the sour reception. The first was a £0.8m fair value impairment to a stake in Israeli medtech company Mobile ODT, after an effort to sell the business earlier this year fell flat. The investment, which has declined in value value to £5.4m from £7.1m a year ago, was initially pitched as a beachhead in Tristel’s push into AI-led gynaecology services.

Swinney now says “in hindsight, we wish we hadn’t” pursued the investment, whose write-down accounts for just under a third of the fall in statutory profit and most of the 2.5 per cent dip in shareholder equity.

Another reason for tempered expectations is a “definitive” timetable for long-awaited US expansion. Pending the recruitment of two or three clinics for patient evaluation studies, management now hopes its key Duo for Ultrasound product will be submitted to the Food and Drug Administration (FDA) by the end of this financial year and approved by June 2023. Broker finnCap expects sales to follow in FY2024, a decade after entry into the US market was first plotted.

It has, to put it bluntly, been a long road, although Tristel's sale of surface disinfectant products in the world's largest healthcare market could soon gain scale. Approvals for Duo’s use as a medical device disinfectant in India, South Korea and Canada all offer further growth promise, in addition to recovering and recurring revenues closer to home.

Consensus forecasts are for earnings per share of 10.5p for the 12 months to June 2022. That estimate is down 30 per cent since the start of this year, and FY2023 expectations have scaled back from a 19.7p peak to 16.3p. As such, and even after a recent pullback, Tristel's shares trade at a near-50 per cent premium to their historic five-year forward price/earnings multiple of 34.

With hindsight, it’s hard to find fault with the latter rating, given net income climbed by an average of 18 per cent a year during that period. But FDA timetables are central to the next re-rating opportunity. Hold.

Last IC View: Hold, 610p, 22 Feb 2021