UPGS’s half-year results included a 47.3% rise in underlying pre-tax profits, bolstered significantly by a 21% normalised increase in sales revenue. An optimistic tone on H2 sales prompts us to raise our full year forecasts and that has positive implications for both the group’s financial strength and valuation.
UPGS translated brisk sales growth into strong profit gains in its first half. Underlying EBITDA increased by 48.4% to £6.6m, underlying pre-tax profits by 47.3% to £5.9m and adjusted EPS increased by 48.7% to 5.8 pence with a 39.8% increase in the interim dividend to 1.16p. Net debt:EBITDA improved to 1.6x from 2.0x at end FY2018.
Current trading was cited as being in line with previous expectations. However, we infer enough optimism in the statement to raise our full year forecasts. We now look for FY2019 sales revenue to be £119.5m, compared with a £117.5m estimate previously, and raise our EBITDA forecast to £8.95m from £8.70m.
A switch from Free on Board (FOB) to Landed terms with a key Continental European retail customer prompted major distortion to FY2018 H1 sales. As a result, the reported 36% growth in FY2019 H1 was much larger than the 21% underlying. Germany and other Continental Europe accounted for 38% of group sales. Domestic sales grew at a slower 2.1% rate, but strong momentum in supermarkets and online suggests that UK sales should accelerate significantly in H2.
UPGS’ strategy remains to develop its portfolio of mass-market consumer goods in its four strategically targeted distribution channels. Importantly, the company delivers not only a value-led proposition but one that maintains a “feel-good” factor. Its offering is not reliant solely on “cheapness”. The “tried and tested” focus on these four channels – UK and European discounters, UK supermarkets, Online platforms and International retailers - appears to underpin the company’s confidence in its growth outlook.
The 9.8x prospective P/E ratio and 5.2% dividend yield, sits alongside the prospective EV/sales ratio of 0.6x. Given a return to sustainable brisk sales growth, an EV/sales valuation closer to 0.8x appears reasonable, which would imply a fair value for the shares of 100p and a still appealing 13.9x prospective P/E ratio.
