Small Cap Value Report (Tue 20 Feb 2018) - TSTL, TRCS, SNX

19th Feb '18 by Paul Scott

30 comments 12432 reads

Hi, it's Paul here.

I've been busy setting up a new computer this morning, and it seems to be working OK now. When I say new, it's actually a refurbished Dell, from Ebay. For about £150 you can get a desktop that has the same performance as a £500 new laptop, and a bigger screen. Now all I need, is to work out how to increase the screen brightness, and find my reading glasses, then everything will be perfect. In the meantime, I'll struggle on with varifocals and a rather dim screen.

Let's start with a couple of reader requests, Tristel (LON:TSTL) and Tracsis (LON:TRCS) .

I shall be updating this article throughout the afternoon, as I'm house-bound today, due to being on dog-sitting duties.

Tristel (LON:TSTL)

Share price: 275p (unchanged today)
No. shares: 43.0m
Market cap: £118.3m

Interim results

Tristel plc (AIM: TSTL), the manufacturer of infection prevention and contamination control products, announces its interim results for the six months ended 31 December 2017, ahead of guidance at the AGM.

Key points;

Revenues up only 10%, but this figure masks stronger growth overseas (up 28%, now half of total sales), offset by a 4% fall in the UK, where it sounds like the market is saturated. These are niche products after all.

Profit margins are excellent, at 18% of revenues.

Pre-tax profits (before share-based payments) up 18% to £2m

Balance sheet is excellent, e.g. current assets of £11.0m dwarfs current liabilities of £2.9m. The only long-term creditor is £185k deferred tax - balance sheets don't come much better than this. So there are no solvency worries whatsoever. Also the company has the capacity to pay decent dividends, which it has in the past. Although the high valuation (forward PER of about 30) means that the dividend yield is modest.

USA launch - this is the main reason that Tristel shares were re-rated a while ago. The £0.5m costs in this half year have been absorbed without hurting profitability. The update today reassures that this new market should be opening up soon;

We are also investing heavily to enter new geographical markets including North America. During the period we spent £0.5m on our North American market entry plan compared to £0.2m in…

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AlanJenkins2

20th Feb '18

See the February 12th Smallcap report/do a search for UPGS under smallcap reports.

Reacher

Well done on setting it up so quickly! I got a new PC for Christmas and it’s still sitting in its box.

mojomogoz

https://www.stockopedia.com/content/oops-upgs-ide-your-head-327743/

I could be very wrong!

danyou

What is particularly pleasing in the Tracsis (LON:TRCS) report is the "blink and you miss it" comment about more work in the US. Given that there is potentially huge potential in the US, this is exciting. Given the company's knack of being very understated, this could be a great driver for future growth.

diamondback

Thanks for info regarding UPGS, I'm not financially stretched but I do a fair amount of browsing/buying in the discount stores and have found a plethora of goods which appear on the UPGS website, granted margins can't be great but in a downturn surely thats where a large % of the populace are shopping and will continue for the foreseeable.Think I'll have a dabble.

Samsgrandad

Tristel (LON:TSTL)

Thanks Paul, a very fair review but if I may add that there is I'm sure a great future for EFFECTIVE cleaning and sterilisation in our world of antibiotic resistance. Page 9 of the presentation on their web site shows 15 regulatory approvals granted, 82 in process and 55 new dossiers started. India and Japan look to be close behind US in approval process.

www.tristel.com/sites/default/files/investor_presentation_feb_18_final.pdf

I don't know tristel, but as someone who works in the medical profession, there are many companies out there doing similar things, and I am not sure there are many differences between different types of sterilisation systems. If so, in these times of cash strapped health care systems, it probably boils down to cost alone.
Therefore, I have no idea how to value future usage or growth of these companies. Same goes for Bioquell...

peterthegreat

Re: Tristel.
Hi danyou, as Paul mentioned, Tristel's profit margins are excellent at 18% of revenues which indicates that its products have competitive advantage in the niches in which it operates and are not competing on cost alone. For me, this is a major attraction of the company.

FREng

Does the accounting treatment of money "recoverable on contracts" that Paul highlighted in the Synectics (LON:SNX) report above comply with IFRS15?

Tristel (LON:TSTL)
"The latest leading healthcare cleaning manual from the NHS has recommended the use of chlorine dioxide based disinfectants, in a form that only Tristel produces, to fight C.difficile and MRSA outbreaks."
So says Cleanroom Technology

https://www.cleanroomtechnology.com/news/article_page/NHS_cleaning_manual_recommends_Tristel_products/59324

Cost is an issue as you say, Tristel for most of its uses requires no power or capital equipment, can be used on equipment which can't be put in a steriliser and can be used by field based health workers and outpatient clinics to turnaround equipment in minutes for the next user. They have patent protection for various ways of chlorine dioxide production and dispensing.

https://www.stockopedia.com/co...

hawkipa

As always Paul, an enjoyable & informative read. I found your explanation on receivables especially enlightening and helpful. These explanations are invaluable for helping develop and hone analysis techniques. So, a big thanks from me and please keep the analysis techniques behind your views coming.
Regards
Paul
ps sorry for accosting you in City airport a few weeks back!

Op margin 6-8.5% last few years. Its a fairly skinny (in terms of capex) business so maybe they can reach double figures with a little growth (if growth expectations for FY2018 came through they would be >10%).

Risks abound and there is some lack of visibility. I think its in the price but it could fall more still.

-1

Hi FREng - that's a fair question. From the 2016 Financial Statements, Synectics (LON:SNX) states FRS 15 will be applied in the accounts for year ending 30 November 2019 - quite a long time away - and the 2016 accounts give very little disclosure of work that has been undertaken so far to assess FRS 15 impact.

Nevertheless, it has an onus to assess each contract and its commercial substance, that is who are the parties, what are the commitments/obligations, rights to goods/services and payment terms can be identified. In addition, the other important element in recognising revenue is "transfer of control". Control may be transferred over a period of time, in which case current process may be correct, or at a specific point in time, in which case revenue may be lower. This is assessed from the customer's perspective.

Hope that helps.

Brian Hamilton

21st Feb '18

Tristel is a share for the future. I disagree with Paul. His analysis is fair until the end. Look at the share prices which need to be achieved for share options to kick in. Buy.

matylda

Interesting comment re: Tristel (LON:TSTL) - Are you bound by MIFID II from presenting the share option data?

seadoc

Paul,

As always good analysis on Tristel (LON:TSTL) The key Question is how secure is the IP? I think it is OK but the IP is not just the patent protection but also the approvals from the market authorities. As you point out this is now over half the globe. As a sailor I reckon that the 4 oceans I have crossed must make a really good moat!

Regards,

Seadoc, holder for 6+yrs and retired surgeon.

Not sure I understand this comment. The prices at which the options kick in are public knowledge, having been published by Tristel.

Just requesting that if you're so well versed why not share them, there were not in the last update I looked at.

No worries.

The details are in the company announcement of 2 November 2017 'Director dealing/ grant of options'. The options will vest in 3 equal tranches if the share price, on average over 3 months, exceeds the hurdle rates of £3.50, £4.25 and £5.00.
Hope this is helpful.

Much appreciated - Thanks

Small Cap Value Report (Tue 20 Feb 2018) - TSTL, TRCS, SNX

Tristel (LON:TSTL)

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Paul Scott

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