Buying quality small-cap stocks while they’re still flying under the radar can produce very nice returns. One little-known share I’ve been eyeing up for my Stocks and Shares ISA is Tristel (LSE: TSTL).
This company has a market cap of just £202m. Here’s why I’m interested.
Infection prevention
Tristel is a medical disinfectant specialist whose products can be found in hospitals, clinics and other healthcare settings.
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The firm has two main product lines. It makes surface disinfectant products and manual disinfectant wipes and solutions for medical devices.
Both use its proprietary chlorine dioxide (ClO2) chemistry. It says: “We are unique worldwide in using ClO2 as a high-performance disinfectant.”
ClO2 is effective against a wide range of pathogens, including bacteria, viruses, and fungi. This makes it a versatile disinfectant solution.
Strong growth
Revenue has grown from £22.2m in 2018 to £36m in 2023. For fiscal 2024 (which ends in June), the firm is forecast to post £41m in revenue.
Looking ahead, analysts see it doubling its top line over the next five years. So there are strong growth expectations here, which I like.
What’s more, the company is expected to report a net profit of £6.7m for this financial year, a 32% year-on-year rise. And profits are tipped to grow steadily in future too.
The firm’s operating margin is a healthy 15%, while it had a cash position of £10.8m at the end of 2023.
There’s even a dividend yielding 3.1%, though cover looks thin at just 1.1 times earnings. That is, the earnings per share only just covers the dividend per share.
Share price performance
Reflecting its progress, the stock is up a whopping 483% over the past 10 years. However, it’s down 37% since reaching a peak in 2021.
It took a dive back then as the pandemic delayed many operations, reducing the need for medical device disinfectants (which make up the bulk of Tristel’s sales).
Since then, higher interest rates have put pressure on small-cap stocks. So the shares are yet to fully recover, despite the actual business continuing to grow.
Big growth potential
While the NHS is Tristel’s largest customer, it also sells its products directly into 14 other countries.
Of these, the vast US healthcare market holds the greatest promise. Ultrasound is the firm’s biggest segment globally, and in 2023 it launched Tristel ULT — a disinfection product used on ultrasound units — in the US.
This has also been cleared by regulators in Canada, while other products are being submitted to US regulators.
What I like here is that Tristel is already a global leader in manual high-level disinfection of medical devices. There are 50m ultrasound scans in North America requiring high-level disinfection annually, but not all probes fit into the cleaning machines.
The firm sees this translating into a $100m per year revenue opportunity for itself and its US manufacturing partner.
Watchlist stock
The only bugbear I have here is valuation. The stock is trading at 30 times forecast earnings. There could be risk investing at this level if US sales don’t grow as strongly as anticipated.
Still, if the market is right about the firm doubling revenue in the next five years, the stock could surge much higher. It’s near the top of my watchlist.
