7:59 cut – UPGS, MGP

UPGS – FY Update

UPGS source, brand and distribute mostly small domestic appliances, audio products and housewares.

Today’s pre-close trading update gives revenue up 41% at £123.3, just over 1% ahead of consensus.

In the past the company has been affected (amongst other things) by an overexposure to B&M Bargains in the UK where caution amongst their customers in 2017/2018 was mirrored by delayed orders and a significant fall in sales. Although revenue for individual retailers is not provided, it is therefore pleasing to see that the growth of international sales has continued – this has resulted in the proportion of international sales moving from 28% in FY 2017, 27% in FY 2018 and 39% in FY 2019, despite a large bounce-back in UK sales.

Although year-on-year online is growth has significantly slowed in H2 and sales are lower than H1, this does broadly fit in with the trading patterns previously seen. I will be paying close attention to the figures for H1 2020.

EBITDA has come in above forecasts and closer to my projections.

The outlook statement is somewhat mediocre, saying that the order book is “moderately ahead of this time last year”, and Equity Development have upgraded revenue forecasts by 1.5%, maintaining their forecast 5% revenue growth. Forecast EPS have also been increased: from 7.9 to 8.1p for FY 2020 and from 8.3p to 8.5p for FY 2021.

The company are clearly providing conservative guidance and as I have consistently said the forecast revenue growth rates are significantly too low given then underlying momentum across multiple locations, brands, channels and product categories. This is reflected by Equity Development who say that “UPGS has consistently delivered trading news ahead of market expectations…investors should take this into account when assessing valuation”.

Temporary setbacks in some markets will happen from time to time, and the level of debt still makes me uncomfortable, but in the medium term I believe revenue should grow at over 10%pa, and EPS faster still, therefore justifying a significantly higher PE ratio than the current 9x. It is well worth noting the near 6% dividend yield. However in the short term there seems the potential for the share price to drift.

This is a top 5 holding for me and I will be looking to add on any significant weakness.

[Edit: Projecting current trends forward with an adjustment for uncertainties in the UK, I see revenue of £132m, EBITDA of £11m and EPS of 9p for FY 2020. That is significantly ahead of forecasts and puts them on a PE of 8.3x]

Medica (MGP) – H1 Results

Medica are the UK leader for providing radiology scan interpretation services using staff working from home.

Revenue is today up 18.2%, but margins continue to fall and EPS is only up 9.4% YoY. It is not clear to me how EPS will grow by the forecast 23.2% in the full year. Forecasts have been falling, but since the last brokers note available on Research Tree is from September 2018 it has been difficult to tell why.

Looking deeper, there seem to be some one-off costs that have not been put through as exceptional items and so you could make the case for an underlying EPS growth closer to 13%.

[Edit: I notice that trade debtors have increased recently. I have heard reports elsewhere of the UK government being slow in making payments recently, possibly related to general Brexit-related chaos, but as always there is the outside possibility that delayed payments reflect a dissatisfaction of some kind.

The purchase of their own data storage infrastructure at a very high capital cost seems bizarre in the extreme when multiple competing low-cost, high-quality cloud providers are available. I suspect the reason has to do with perceived data protection issues, but I know of no legal or technical reason why cloud providers cannot be used provided data is encrypted before being uploaded.

I currently hold, but I am not entirely comfortable with the achievability of forecasts here]

[Edit2: After a further review I have now entirely sold out. Negative factors are: Director share sales, structurally falling margins, no Research Tree coverage, falling earnings trend, risk of an EPS miss, worsening cashflow, negative cash, IT risks and relatively high valuation. On the positive side I would say that FY revenue looks likely to be closer to £45.5m than the £44.5m forecast.]