Updated: Mar 4
Tristel is a specialist in infection control products. I first became aware of the small AIM-listed company during the coronavirus pandemic as a potential beneficiary given the obvious nature of the business. However, scratching a little beneath the surface, Tristel’s core product line is focused on the decontamination of medical equipment. With a potential slowdown in procedures due to the pandemic, I was wary of this having an adverse effect on the business. Tristel reported interim numbers today, and this article will aim to review the recent performance of the business and evaluate whether Tristel should have a place in your portfolio.
Tristel has been in operation since the 1990s, however, it was only listed on AIM in 2005. It’s a spectacular example of what an injection of investor cash can do to a small business as the shares are up 1200% from its 2005 IPO (although, the shares traded sideways until 2014, which is a lesson to investors in itself!). Buying companies with technologies or business operations in development can take years to pay off, and there is often plenty of opportunity to buy good companies with proven technologies after they have proven themselves financially. Today, Tristel operates in a select number of global markets, notably in Europe and the US, and splits itself into four distinct segments:
Tristel: the core business, focused on medical device decontamination
Anistel: infection prevention for the animal healthcare and veterinary industry
Crystel: lab and pharmaceutical disinfectants
Cache: surface disinfectants and decontamination
In terms of size, Tristel’s core medical device decontamination business earns the lion’s share of revenues, with £20.5m in sales at the year-end 2020. Cache, the surface disinfectant business, is the next largest with £4.9m in 2020 sales. Lastly, the non-core Crystel and Anistel business delivered £3.3m.
The actual product behind each line of Tristel’s business is Chlorine Dioxide (if you would like to read the science behind Chlorine Dioxide, information can be found here). Tristel has taken years to develop the science behind using Chlorine Dioxide as a disinfectant for various use cases, which has involved patents, peer-reviewed studies and efficacy and safety data. In addition to Tristel's growing distribution network, these scientific necessities create a barrier to entry for the best of well-intentioned upstarts. To date, Tristel is the only known manufacturer and distributor of Chlorine Dioxide for decontamination.
This graph is an excerpt from the 11-minute interim update presentation delivered by Tristel on the 22nd of February, available here.
The above graph shows the core Tristel business in dark purple, the Cache business in pink and the non-core business in grey. Brexit related stockpiling is also seen in light blue in Q1 & Q2 2021. The onset of the pandemic officially impacted Tristel in Q3 2020, which was evidenced by a jump in core Tristel disinfectant sales, which the company denotes to hospital panic buying, and a sharp increase in the Cache product sales as hospitals prepped for increased cleaning routines. This strong performance was offset in the following two quarters with a decline in Tristel medical device disinfectant sales. This was likely due to stockpiles being already built up and the decline in procedures as elective surgeries were halted and hospital space converted to Covid wards.
Although core Tristel sales dropped due to the pandemic, the Cache business was a clear beneficiary, with an almost doubling of sales in Q4 2020. Since then, as 2021 has seen a resuming of elective procedures and a more varied type of hospital in-patient than just Covid-19 cases, the core business has ticked back up, and the Cache disinfectants have returned to their more modest sales levels. The interim report stated that revenues have grown 15% to the half-year ending December 2020. This growth for the core business is a testament to the diversified model Tristel operates, and likely due to much hard work and flexibility from management in order to adapt to the challenging business environment. However, it would be incorrect to say that Tristel has benefitted from the pandemic. Its core product line relies on the frequency of surgical operations, and growth in the full years of 2019 and 2020 notched 18% and 22% respectively, thus, the pandemic has delivered a marginal slowdown in revenue. The Cache business took up some slack, and the company does mention that they believe hospitals will be cognizant of keeping to stricter cleanliness routines going forwards, but in the last two-quarters, Cache’s growth has declined steeply. Whilst there is sound reasoning and clinical evidence for using Tristel’s Chlorine Dioxide on medical devices that need a quick turnaround, I am unsure as to whether hospitals will adopt this as a core product for surfaces as opposed to your typical bleach or industry-standard disinfectant.
There were, however, some other areas of interest in the latest interim report. Business has commenced in India and Malaysia (albeit from a very low base), and international sales were up 20% now representing 60% of total group sales. Progress has been made on a few product lines, with a notable progression in the US FDA application of the De Novo foam based product.
Looking into Tristel’s financials over the last four years, you will find a very solid business. Revenue growth has been achieved and is expected into 2021. Operating margins are at a very reasonable average of 19%, whilst notably improving from 2020 into 2021. The business typically has no debt and has a modest net cash position. Return on Capital Employed (ROCE) has remained around the 20% mark, which is very impressive indeed. In summary, whilst still a small business, Tristel delivers from a financial perspective, and the market has likely rewarded the company for its superior metrics.
In terms of valuation, Tristel priced at 610p trades at 50 times 2021 earnings, falling to 44 times 2022 earnings if estimates of 14p earnings per share can be met. This is expensive, and contrasting this to 2019 where Tristel had a P/E valuation of around 25, it looks as though the market is paying a significant premium for the company today. There are likely investors bidding the company's shares up because they think that Tristel’s prospects will have been improved by the pandemic, I for one don’t believe that this is the case. If you, like me, believe little has changed in Tristel’s prospects since 2019, it may pay to wait around a little in the hope that the valuation returns to a level more reflective of the business in its former years. Conversely, you may be impressed with the might of Tristel to grow even in the face of the pandemic, which you believe denotes a further premium for the shares. Either way, I do believe Tristel is a quality business with superior financial metrics, which should be placed on an investors watchlist for the long term.