Since the Covid-19 pandemic began we’ve endured a vast amount of disruption to everyday life and hospitals have seen a surge of additional pressure. Due to the highly infectious nature of the virus, hospitals are having to put in place more rigorous cleaning and disinfecting practices, something that has greatly benefited this ‘Covid stock’.
The Covid stock opportunity
Tristel (LSE:TSTL) manufactures infection prevention, contamination control, and hygiene products. Its leading technology is a proprietary chlorine dioxide solution that it incorporates into its high-performance disinfectants.
The business model is relatively simple. Tristel creates and sells its portfolio of disinfectant products to hospitals and veterinary clinics under three different brands – Tristel, Anistel and Crystel.
It has also begun building a new brand – Cache. It’s an offshoot of the Tristel brand that will specialise solely in surface disinfection for hospitals.
Since each product is fundamentally a consumable for medical institutions, it creates a continuous need to repurchase the same product frequently. Given the difficulty of receiving approval for such products from regulators, the selection pool for hospitals is very narrow, reducing the brand’s active competition.
The business
| Revenue Breakdown £m | Brand | 2019 | 2020 |
| Medical Device Decontamination (Hospitals) | Tristel | 20.8 | 35.5 |
| Environmental Surface Decontamination (Hospitals) | Cache | 2.6 | 4.9 |
| Other (Hospitals & Veterinary Clinics) | Crystel, Anistel, Miscellaneous | 2.8 | 3.3 |
The firm’s leading source of revenue derives from its Medical Device Decontamination (MDD) line of products. It’s expected to continue growing organically from the introduction of a new ultrasound probe disinfectant set to launch in Q2 2021.
However, the management team has identified an underlying trend in its Environment Surface Decontamination (ESD) line of products. The aftermath of Covid-19 is expected to result in new legislation that will most likely require hospitals to rigorously improve their cleaning and disinfection practices.
In the four months leading up to June 2020, it saw a rapid increase in the consumption of its ESD products. This trend is expected to increase as the year progresses, improving its revenue streams.
The financials
| £m | 2020 | 2019 | 2018 | 2017 | 2016 |
| Revenue | 32 | 26 | 22 | 20 | 17 |
| Operating Profit | 6.8 | 4.7 | 4.0 | 3.9 | 2.6 |
| Operating Profit Margin (%) | 21.3 | 18.1 | 18.1 | 19.5 | 15.1 |
| Return on Equity (%) | 18.2 | 17.5 | 18.2 | 21.4 | 14.0 |
The stock has achieved an impressive top-line revenue growth rate of 17% year-on-year for the past five years that has primarily been driven by international sales. While certainly rewarding shareholders, this dependence on overseas trade introduces a considerable currency exchange rate risk. That’s because it has resulted in almost 60% of revenues being generated outside the UK.
Operating profit has also seen double-digit growth of 28% year-on-year courtesy of improved margins as the firm streamlines its operations.
These growth rates combined have allowed shareholders to reap a sizable return on equity as well as a 360% increase in the share price over the same period.
It all sounds good for this particular Covid stock, but with a P/E ratio of just over 40, the stock is certainly not cheap.
Since 2019 the price has appreciated by 49%. However, this return appears to be primarily driven by shareholder expectations of future performance. Therefore it’s likely to see short-term price volatility if earnings don’t meet expectations over the next few quarters.
The bottom line
With the firm seeking FDA approval of its products early next year, it could open up the entire US medical market to it for operational expansion. I think this growth opportunity, combined with the rising demand for disinfection products caused by the pandemic, makes the high valuation justified, and this a Covid stock worthy of consideration.
