22 May 2015
By Maynard Paton
Quick update on Tristel (TSTL).
Event: Trading update published 21 May.
Summary: At last — one of my shares has issued an ‘ahead of expectations’ trading statement! TSTL’s medical wipes appear to be selling very well and second-half profits now seem set to grow by 35%. There could be further upside, too, if TSTL’s past ‘sandbagging’ form is anything to go by. My valuation sums still suggest annual returns of 15%-plus could be earned. I continue to hold.
Shares in issue: 40,949,701
Market capitalisation: £34.8m
Click here for all my previous TSTL posts.
* Second-half profits up at least 35%
Full-year pre-tax profits of not less than £2.5m indicate pre-tax profits of at least £1.5m for the second half — equivalent to a 35% increase on H2 from the year before.
TSTL’s first-half results from February had already showed pre-tax profits up 43%, so I am very pleased the group’s significant trading momentum has continued.
* Could there be further ‘sandbagging’?
I have noted in the past how TSTL has ‘sandbagged’ its statements, with subsequent results coming in well above the earlier ‘no less than’ forecast.
In the event, full-year 2014 pre-tax profits came in at £1.8m — some 20% above the ‘no less than’ £1.5m figure.
I’m hopeful the latest ‘not less than’ £2.5m figure will be beaten by a similar margin!
* On track to easily meet the 2017 revenue target
TSTL’s interim results confirmed the group was aiming to grow its revenue by at least 50% to £20.2m during the three years to June 2017.
That top-line target looks very achievable now. The interim results webinar revealed the business was aiming for 15% margins for the current year, so a pre-tax result of £2.5m suggests turnover for this year could be about £16.7m.
As such, I now feel it is not out of the question to see revenues top £19m for 2016 and approach £22m for 2017.
* Earnings of 4.6p per share?
Using the 26% tax charge applied in the interim results, a pre-tax profit of £2.5m would produce full-year earnings of 4.5p per share.
I just wonder if we could see 4.6p or even 4.7p per share, as that would mean the indicated 2.34p per share full-year dividend would be twice covered.
I recall thinking it was odd that commissioned-broker Equity Development was looking for earnings of 4.01p per share — and therefore dividend cover of only 1.7x — prior to this latest statement.
For what it is worth, Equity Development is now forecasting earnings of 4.36p per share for 2015 (and therefore dividend cover of 1.85x).
* My estimate of surplus year-end 2015 net cash is now £3.7m or 9p per share. TSTL’s near-term enterprise value (EV) could therefore be £31m or 76p per share. Using the aforementioned 4.5p per share earnings guess, the forecast P/E on my EV is 17.
* I was previously projecting 2017 revenue of £20.2m but I think that is now more likely to be closer to £22m.
* Applying margins of 15% and tax at 26% on that 2017 revenue gives me possible 2017 earnings of 5.9p per share (versus the 5.5p per share I was previously expecting)
* Applying a P/E of 17.5 on that 5.9p EPS estimate to reflect the growth expected during the next few years (and TSTL’s longer-term opportunities in the States), I arrive at a potential 2017 value of about 104p per share for the underlying business.
* Between now and 2017, I think TSTL could pay out a further 5p per share through dividends and retain a further 6p per share of extra cash in the business (to give a net cash position of 15p per share).
* So… 104p plus 5p collected via dividends plus net cash of 15p gives a potential total value of 124p per share during 2017.
* Assuming my sums are accurate, I’m looking for 45% upside from 85p during the next couple of years — equivalent to compound returns in excess of 15%. That projection matches the calculations I made back in February.
* Next update — probably a pre-close statement in late July.
Disclosure: Maynard owns shares in Tristel.