Brisk growth rate supports higher valuation

The ongoing pandemic only serves to underline business models that are robust, and those that aren’t. This morning’s trading update from UPGS puts them firmly in the winners’ category. As the company approaches the final weeks of FY2020, it not only reports “better than expected progress” against an uncertain business backdrop, but also that revenue and key profit measures for the year should be ahead of current market expectations. Furthermore, online as a portion of total business should record a fourth consecutive increase, providing additional flexibility and strength in the case of a second wave.

Brisk growth, higher online sales and demonstrable management flexibility is overdue more recognition from investors and a higher valuation for the business.

The unscheduled trading update released today includes three important upgrades. Revenue for the year ending 31st July 2020 is now expected to be above £111m, which compares with our most recent £105m forecast that we published in an 8th June 2020 report "Equity Development - Satisfying customer demand". New EBITDA and underlying pre-tax profits expectations also represent upgrades from our most recent forecasts: rising from £7.9m to above £9.6m and from £5.9m to above £7.4m, respectively.

The company’s 0.6x EV sales ratio appears surprisingly low given its ability to grow sales rapidly and profitably on a cash positive basis. Moreover, based on our revised estimates EV/EBITDA and the P/E ratios also look good value. Given the company’s proven track record, we see a 0.8x EV/sales ratio, 9.4x EV/EBITDA and a 14.0x P/E ratio as being more appropriate.

The implied share price at these multiples is 100p.