The Tristel (LSE: TSTL) share price crashed when markets opened on Monday. The fall came after the medical disinfectant specialist warned that 2021 profits will be lower than expected.
Tristel shares are down by 17%, as I write, leaving them 12% higher than one year ago. Even so, this stock remains an impressive winner on a longer-term view, up 375% in five years. I’m wondering whether the big gains are in the past, or whether today’s drop could be an opportunity for me to buy into Tristel.
What’s gone wrong?
Tristel has two main product lines. It makes surface disinfectant products and medical device disinfectants. Both use the company’s proprietary chlorine dioxide chemistry. The NHS is Tristel’s largest customer.
Over the last year, the Covid-19 pandemic has driven a sharp increase in sales of surface disinfectant products. The problem is that sales of Tristel’s medical device disinfectants have slumped.
The pandemic has forced the NHS to delay/cancel thousands of procedures in areas such as urology, ENT, cardiology, and gynaecology. Tristel’s products are used to disinfectant the devices commonly used in such examinations. This means demand has been much lower than usual.
Tristel’s management now expect pre-tax profit for the year to 30 June to be “not less than £5m.” This is a big miss on broker forecasts I’ve seen of £7m, hence Tristel’s share price fall today.
Is it as bad as it looks?
In its first-half results in February, Tristel said that sales of device disinfectants were suffering because of the impact of Covid-19. Even so, the company generated a pre-tax profit of £3.1m during the first half.
However, it seems like half-year sales may have been boosted by Brexit stockpiling. This is now unwinding. Today’s news suggests the firm’s profits are expected to fall to around £2m during the second half.
I think it’s worth remembering that even after Covid-19-related growth, surface disinfectants are still a relatively small part of Tristel’s business. During the six months to 31 December, surface disinfectant sales totalled £2m, compared to £13.1m for medical device disinfectants.
Costs are also rising sharply. According to management, Tristel’s cost base has risen by 6% (£0.8m) over the last year, as the business has recruited new staff to support expansion.
This increase in costs represents 11% of last year’s pre-tax profit. With Covid-19 putting pressure on sales of the company’s main product range, I’m not entirely surprised by today’s profit warning.
Tristel share price: watching brief
In general, I think Tristel is a good business with long-term growth potential. If the company can finally gain regulatory approval in the US, sales growth could accelerate. However, the company’s attempt to expand in the US has been ongoing for years, with no success so far. It’s been expensive too — Tristel spent £750,000 generating scientific data for US regulators last year.
Tristel shares looked expensive to me before today’s profit warning, and that hasn’t changed. At around 550p, I estimate the shares could still be trading on about 60 times 2021 forecast earnings.
In fairness, I think Tristel should deliver a strong recovery in 2021/22. But the stock’s strong valuation doesn’t seem to provide much margin for error. I’m not comfortable buying at current levels.
This is a story I’ll continue to watch from the sidelines.