The ongoing pandemic only serves to underline business models that are robust, and those that aren’t. This morning’s trading update from UPGS puts them firmly in the winners’ category. As the company approaches the final weeks of FY2020, it not only reports “better than expected progress” against an uncertain business backdrop, but also that revenue and key profit measures for the year should be ahead of current market expectations. Furthermore, online as a portion of total business should record a fourth consecutive increase, providing additional flexibility and strength in the case of a second wave.
Brisk growth, higher online sales and demonstrable management flexibility is overdue more recognition from investors and a higher valuation for the business. The unscheduled trading update released today includes three important upgrades. Revenue for the year ending 31st July 2020 is now expected to be above £111m, which compares with our most recent £105m forecast that we published in an 8 th June 2020 report "Equity Development - Satisfying customer demand". New EBITDA and underlying pre-tax profits expectations also represent upgrades from our most recent forecasts: rising from £7.9m to above £9.6m and from £5.9m to above £7.4m, respectively.
UPGS’s flexibility – a key component of its ability to deal with the economic uncertainty associated with Covid19 - is reflected in a higher portion of sales transacted online. We infer that the company is on-track to meet its 20% target for online sales sooner than expected. In the first half of the year online was 11.3% of sales compared with 9.3% in the same period as last year.
Despite the Covid-19 pandemic, UPGS’s attractions as a growth story remain intact. Underlying demand growth for the company’s “feel good” branded product is brisk having recorded 12% compound growth rate in the 5-years to FY2020, based on revised expectations. Moreover, the company’s management should be highly commended for simultaneously continuing to source product out of China and growing end-market sales revenue despite the prevalence of lockdown in its key European markets.
A combination of brisk sales growth, an increased online portion of business and clear demonstration of agile management all argue in our view for a significantly higher valuation.
The company’s 0.6x EV sales ratio appears surprisingly low given its ability to grow sales rapidly and profitably on a cash positive basis. Moreover, based on our revised estimates EV/EBITDA and the P/E ratios also look good value. Given the company’s proven track record, we see a 1.0x EV/sales ratio, 10.4x EV/EBITDA and a 14.0x P/E ratio as being more appropriate. The implied share price at these multiples is 100p.