Nothing to Fear For UP Global Sourcing (LSE: UPGS)

The consumer market at this point of change so will produce opportunities, we missed with Warpaint, but UP Global Sourcing (LSE: UPGS) already had its profits warning and the shares are yet to recover and will report its second finals early next week.

It listed onto the Standard market in March 2017 at 128p when founding directors sold £56m. The management team still hold 44% and are backed by Schroder’s, Ennismore and Hargreaves. The plan is to accelerate growth with international expansion, build its online platform and make opportunistic acquisitions.

In September 2017, which was alarmingly soon after the IPO, sales were reported to be declining due to the deterioration in the environment for general merchandise as consumers’ discretionary spend is under pressure, fragile confidence and increased cost pressure. UPGS own, manage, design and develop an extensive range of value-focused branded consumer goods. Including Beldray, which was established in 1872, George and Wilkinson, Salter and Russell Hobs. The product range covers electrical, food prep, stoneware and textiles and more. Its customers include high street stores such as; Aldi, Morrisons, Asda, Tesco and Sainsburys.

The product and brand range are extensive and was extended with the low-cost purchase of the intellectual property rights of Kleeneze cleaning, laundry and homewares brand founded in 1923. Over time Kleeneze will launch a range of laundry and floorcare products for sale into the retail channel and via online channels. The team have successful made other opportunistic brand acquisitions and successfully relaunched them, the most notable example is Beldray in 2009.

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The management reported an increased order book, so revenue growth is cautiously being forecast. Our confidence in the recovery is increased by an Non-Executive Director purchased shares at 33.4p and Schroders increasing its stake to 15%. Additionally, the recently published research from Equity Development reinforces the view that the recovery is well underway.

The finals for the year end July 2018, are likely to show a 20% fall in revenue to £87.4m. The underlying EBITDA should be in-line with the previous downgrade with a 43.8% fall to £6.5m (FY17: £11.5m). The PBT is expected to halve to £5m giving an EPS of 5.2p and a prospective P/E of 6.5x, while a 2.7p dividend is forecast to yield 7.5% and a P/E of 10x would imply a price of 52p.

Financials

Net debt reduced to £6.7m at the interims and there is £8m headroom on its debt facilities giving sufficient working capital. The dividend would be twice covered, and we expect to be maintained.

Trading Strategy

Up Global Sourcing Holdings (LSE: UPGS)

33.5p (32-35p)

Mkt Cap: £33m Std list

Next Results: Finals Tuesday 6th November

 



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