Cash generation drives shareholder value

Ultimate Products’ (UP) sales fell by 4% in the first six months of FY2024, with the likelihood of a broadly flat full year. But the company’s FY2024 profit expectations - and our own EBITDA forecasts - remain unchanged as improved gross margins should offset lower sales.

UP’s first half sales setback was caused by 3 important temporary effects. First, the company lapped an unusually strong period a year earlier when demand for air fryers was at a peak. Second, supermarket overstocking has taken longer to dissipate than might be expected. Third, UP was negatively affected by disruptions to global supply chains related to conflict in the Red Sea. In contrast, the gross margin outlook is significantly more positive as the uplift to gross margins achieved in the second half of FY2023 appears likely to be retained in FY2024. We increase our gross margin expectations in FY2024 from 25.5% to 26.6%.

Some idea of buyback potential is available from today’s trading update. The company targets long-term net debt/EBITDA at 1.0x. If our expectations for end-FY2024 net debt of £8.0m are met and £21.6m EBITDA are met, the implied headroom for share buy-backs would be of the order of £13m to £14m – equivalent to around 10% of the company’s current market cap.

With positive news on the scope for buybacks in our view offsetting lower than expected sales revenue in FY2024 we maintain fair value of 250p for the shares.