UPGS Research Note Commentary

Equity Development have issued a new research note this morning. This and their previous notes can be found here.

As expected they raise their 2019 EPS forecasts following todays H1 results, but only modestly from 7.0p to 7.2p. Given that H2 2018 cannot be used as a reliable comparitor, the considerable changes to the business since H2 2017 and the £1.4m of revenue brought forward from H2, this is very difficult to sense check.

However their forecast for FY2020 up from 7.3p to 7.6p on revenue just 5% higher than FY2019 continues to look far too low. It is clear that at current normalised growth rates we should be looking at revenue growth in excess of 20%. With operational gearing (today they confirmed that admin costs were growing more slowly than revenue), something in excess of 9p EPS looks far more likely. If the European business continues to growth at anything like recent rates then its greater weighting could easily drive EPS above 10p.

It is important to note that Equity Development’s research is paid for by UPGS and so will closely (or even directly) represent the forecasts that UPGS themselves would want to project publicly. My view is that this is a solid company with sound management. All the indications are that management were rather embarrassed by having to issue profit warnings so soon after flotation and for this reason have been extremely cautious in their forecasts since then. They have also been big buyers of the shares.

The risk is of course of a downturn in trading or further one-off factors of the kind seen in FY2018. Earnings have been shown to be volatile and the company continues to carry debt. Despite the potential for high growth this limits the rating that can be justified in the market.

If this were not one of my largest holdings I would continue to be a buyer even after today’s rise, however I will also be monitoring for overvaluation. If last year’s pattern is followed then the next update will not come until FY revenues are confirmed in September.

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