Infection control specialist Tristel’s (TSTL:AIM) recent earnings per share downgrades are not cause for major concern. This merely reflects a rise in R&D spent that is needed to drive future profitability.

Earnings for the financial year to 30 June 2016 have been reduced by 3% to 5.2p by FinnCap’s analysts. The cut to their forecasts for the following 12 months is a much deeper 21% to 5.6p.

These figures have been altered to reflect the additional £450,000 the Suffolk-based company is expected to spend during this period to gain approval to sell its products in the lucrative
US market.

The small cap makes and sells disinfectants, wipes and sprays for cleaning medical and scientific equipment in hospitals and laboratories to stop infections spreading.

Tristel is forecast to make a £2.9 million pre-tax profit in 2016, 16% higher than a year earlier. This is expected to improve by 13.7% in the following 12 months to 30 June 2017.

A major downside of the increased R&D spend will be a cut to the dividend. Investors are forecast to get 2.8p a share for the current financial year, equal a 2.6% yield.

This is half the 5.7p that was returned to shareholders in 2015. Investors are expected to get 3p a share dividend in 2017.

Tristel is admittedly expense, trading on 21 times downgraded earnings while shares are priced at 109p each. The focus on driving international growth appears to be worth short-term disruption as the company looks to offset lacklustre sales growth in the UK.

Tristel’s sales in its home market improved by 2% in the first half of the current financial year, while overseas sales were 20% higher compared to 12 months earlier, accounting for 36% of company sales.

The company currently has no sales in the US, but is preparing to submit two products to the country’s regulator this year. It has already submitted a preliminary file to the Food & Drug Administration (FDA), the regulator.

Other pluses include Tristel having £4.3 million cash and no debt as well as making an attractive 71.4% margin.

Key markets are Germany, China and Hong Kong, while Australasia’s revenues contracted by 1% in the first half of the year.

Tristel is taking sensible steps to reduce its reliance on a sluggish UK market. We are bullish.

SWOT ANALYSIS

STRENGTHS

• Large margins

• Debt free

• International sales network

WEAKNESSES

• Dividend cut

• Low UK growth

• NHS is a quarter of group sales

OPPORTUNITIES

• US submissions

• Higher R&D spend

• £4.3 million cash

THREATS

• FX headwinds

• Regulation

• European competition