Small Cap Value Report (Mon 11 Feb 2019) - UPGS, AVAP

Good morning, it’s Paul here!

It’s a very quiet day for trading updates, and results.

Graham and I had a natter about some stocks in my portfolio, just after the market closed on Friday evening. Here’s that podcast, which is a potentially painful 1 hour long. We continued chatting about Brexit for another 1.5 hours after that, but you’ll be relieved to hear that Graham had switched off the red button before that started!

Incidentally, the picture that Graham chose to illustrate the podcast, of some people playing football, perfectly sums up my school memories of football – namely the player (in red) on the right, who is recoiling in horror, in a slightly camp way, as the football comes in his direction amp; he feels the pressure of having to do something with it. Yep, that was just like me;

Share price: 65.2p (up 12.4% today, at 11:38)
No. shares: 82.2m
Market cap: £53.6m

Trading update

Ultimate Products, the owner, manager, designer and developer of an extensive range of value-focused consumer goods brands, announces the following trading update for the six months ended 31 January 2019 (“the period”).

This company, which imports consumer goods from China, I think, was a very disappointing stock market float in March 2017. It floated at 128p per share. Note that the float did not raise any cash for the company, it was a sale of 50% of the company, raising £52.6m for the selling shareholders. I’m really not keen on this type of float, as they often seem to go wrong later.

Initially UPGS shares did well, and rose to a high of about 223p. Then came the (first) profit warning, in Sept 2017, just 6 months after floating. I really do think that selling shareholders should be legally required to repay some or all of the proceeds, if a share price collapses so soon after listing. Maybe listing proceeds should be put into escrow, and released gradually over say 3 years? Or have a clawback clause?

After languishing for a while, the share price has had something of a recovery recently, so this share could be worth a fresh look. People who follow sentiment via the chart amp; moving averages, etc, might like this. I think there’s also something to be said for looking at shares which are resilient in a lousy market such as we have now.

H1 trading – this company has a 31 July 2019 year end date, so today we’re looking at H1 performance, and full year outlook.

My summary of today’s update;

• Revenues – good growth, up 36% reported, up 20.8% underlying (stripping out one-offs) – impressive that the company has disclosed this openly
• Comfortable headroom on funding (i.e. bank facilities) of £10.5m
• Nothing said about H1 profitability (doesn’t matter though, as FY outlook is given below)

Current trading amp; outlook – this is good;

As a result, and notwithstanding the higher overhead costs associated with servicing the increased revenue and the investment in the growth of the international business, the Group now anticipates that its EBITDA performance in FY19 will be above the market’s current expectations.

Why do companies use EBITDA as the performance measure? It just arouses suspicion. Profit before tax is the correct performance measure to use. That gripe aside, above expectations is a clearly positive outlook.

Broker forecasts – there’s an update from Equity Development today.

FY 07/2019 EBITDA (yuk!) is raised 10% to £8.7m

Adjusted EPS forecast is 7.0p, half paid out in divis of 3.5p

That gives: PER of 9.3, and yield of 5.4%.

My opinion – it always takes time for investor confidence to rebuild after companies disappoint with profit warnings.

UPGS share price has more than doubled from its recent lows. That to me looks justified, given today’s update.

Looking at its last balance sheet, overall it’s OK. There’s a fair bit of debt, but that is only partly financing inventories amp; receivables, which looks fine to me. 

Taking everything into account, I think the current share price looks about right. The positive chart might lead to momentum buyers taking it a bit higher, perhaps?

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