Up Global Sourcing (LSE: UPGS) flies under the radar of most investors, despite the fact that this obscure business has grown revenue by around 40% per annum over the past three years. That said, the company only went public at the beginning of March this year, so investors haven’t had much time to evaluate the opportunity.
Today shares in the company have been almost cut in half after it released a strong trading update but warned on its outlook.
For the year ended 31 July, group revenue increased by 39.1% to £110m and off the back of this performance management now expects to report “underlying EBITDA and underlying PBT performances that are above market expectations” when official full-year figures are published.
However, despite this upbeat statement, the results have been overshadowed by a warning regarding the company’s outlook. Specifically, today’s release noted that thanks to growing consumer caution and pull-back in orders from customers, “revenue growth for FY18 is unlikely.“
Does the business offer value?
Up Global owns, manages and designs “an extensive range of value-focused consumer goods brands.” The group’s range of products currently consists of 3,000 product lines in 12 categories and brands such as Russell Hobbs.
Up Global’s position reflects the wider view of the UK consumer, so it could be said that investors should have seen today’s warning coming. As inflation has picked up and wage growth has remained elusive, the UK consumer is being squeezed — that’s without considering the uncertainty provided by Brexit. To help try and reduce its reliance on the UK, management has inked deals to open major retail accounts in Germany and so far, demand in this region appears healthy. According to today’s release, “given the group’s promising early progress there and the positive consumer data that is emerging from the region, the board sees significant potential for long term growth in this market.” So, it looks as if this diversification will pay off over the long term.
The big question is, how should investors react to today’s cautious trading statement? Shares in the company have fallen by 45% in early deals, which seems to be an overreaction, although, before the announcement, the shares were trading at a premium growth multiple of around 21 times forward earnings. Now that growth has evaporated, it makes sense that the shares should re-rate lower, but the market’s reaction seems to be overdone.
After losing half their value, the shares now trade at a historic P/E of 11.1. As of yet, City analysts have not reconfigured their forecasts to reflect the lower growth expectations of management, so a historic P/E is the best way of valuing the business. This valuation seems to undervalue the business.
The rest of the Household Goods Industry trades at a median P/E of 14.6, so Up Global is trading at a discount to the wider sector of 24%. Also, after recent declines, the dividend yield has spiked to 4.4%. The payout is covered twice by earnings per share.
