UPGS – Full Year results

Ultimate Products (UPGS) source, brand and distribute mostly small domestic appliances, audio products and housewares. This morning they issued their annual results which I have now fully digested. This article supersedes this morning’s 7:59 cut.

Turnover, international split and underlying EBITDA had already been reported in early September, a little over a month past their end-July year end, and covered here, but for the sake of completeness they were strong, with revenue up 41% and underlying EBITDA up 53%.

Today’s announcement sets out the taxation, amortisation, depreciation etc. and therefore EPS. These costs proved to be slightly lower than expected resulting in EPS of 8.2p (up 52%) versus guidance via Equity Development of 8.1p. Cashflow also proved to be ahead of modest expectations.

But the most important information today was the detailed breakdown in different departments, associated commentary and general outlook.

I was initially disappointed that the exceptional German growth seen in H2 2018 and H1 2019 following the opening of a local office and showroom in April 2018 had stalled. However growth in the 3x larger Europe (ex. UK and Germany) region has continued after adjusting for one-off and seasonal factors, more than compensating and boding well for FY 2020. It seems that the strategy of using the Germany presence as a base to sell into neighbouring countries may be working.

The detailed commentary is very strong:

• UK Discounters, which have been a drag on sales recently, are described as “returning to growth” in H2
• Supermarkets grew 67% and it is said “strong growth has continued [into] H1 FY20”.
• Online also by 63% and momentum has “continued into FY 20 with turnover to date significantly ahead of last year”.

There are reasons to be optimistic elsewhere, for example that the gross margin compression due to a weak pound in H2 will reverse for FY 2020.

There are however several negative points:

• Debt is relatively high. Boasts that net debt/EBITDA has fallen from 2.0x to 1.5x from a company that has recently suffered a 45% year-on-year in EBITDA does not reassure me. Balancing this, the loans are mostly cheap invoice discounting, they have plenty headroom and they’ve recently been refinanced.
• Cash flow is very poor. However this is due to working capital being consumed by high growth and will normalise as growth slows. There is limited scope for more changes from free-on-board to landed that previously caused exceptional outflows.
• A planned investment of £1.8m in the head office in FY2020 will further affect cash flow.
• The dividend is not secure. Given the above and in accordance with the stated dividend policy, any setback would result in a dividend cut. In my opinion the dividend policy is currently too generous.

The overall outlook is more muted than the individual segment commentary, emphasising the uncertainties in the UK and describing the order book as “moderately ahead of this time last year”. Equity Development have been guided to maintain the forecast of 5% sales growth for 2020, yet I would describe 5% as “slightly” or “marginally” ahead, whereas to me “moderately” means around 10%. Regardless of this, the company has a recent track record of conservative guidance.

Projecting recent trends forward I now see FY 2020 revenue of £140m (with £80m in H1), EBITDA of £13m and EPS of 11p. This is ahead of my earlier estimates due to stronger growth in the large “Rest of Europe” category and from UK Supermarkets. It is also significantly ahead official guidance. Accordingly I expect a positive trading update in early January.