More UPGSide?

Sunday, Feb 10 2019 by


I attended UP Global Sourcing Holdings (LON:UPGS) site visit 7 Feb. There will be trading update on Monday 11 Feb.

I wrote this note when share price collapsed sub 40p:

I was buyer down into the 30s as despite the post-IPO blues and disappointments I felt that their woes were understandable and non-critical. So far so good in that trading seemed to have recovered despite the tough background.

If you are interested MD Andrew Gossage gave a useful presentation at Equity Development event which can be watched here:

Anyway, what follows is my update following the site visit. In conclusion I believe this stock has the potential to travel a long way from current 57p. How far depends on some factors that need to be proved out that I detail below. if the proving is good then I can envisage holding this for many years as it continues to surprise to the upside, grow earnings and push up its valuation rating.

Information and views on UPGS

The origin of UPGS was Simon Showman in the 'close out' business 20 years ago. That is buying product from known brand at below cost (c.40% of cost) as the seller needs to shift product out of the way for some reason. UPGS still do some of this (I can't remember if 5 or 10% of revenue) and for example have bought stock from Alessi to punt at discount.

Senior team have been together for a long time and have shown the ability to be both opportunistic and strategic. On site met with founder Simon Showman (I get the impression he's not really keen on doing the external stuff like this as he wants to get on with business...he's going to have to show more of himself over time to take UPGS up in investor eyes and help the stock into a teen multiple). He's your real deal entrepreneur left school at 15 to make money. 

My sense from meeting is well balanced team with Showman the guy that pushes boundaries and key relationships and the others around him keeping the show on the road and preventing overreach and missteps. There seems to be mutual respect and trust. These are things that can never be sure of as an outsider but my impression is strongly positive. Gossage ensures that operationally everything runs to order. There's real pride and achievement from these guys and I believe a drive to do a lot more.

Partnering with Salter and Russell Hobbs to create product under the cache of their brands names has been a winner. Salter license runs to 2024 whereas Russell Hobbs up for renewal next year (but mgt expect to renew for 3 yrs soon). To both they pay 5% of wholesale price which each product cleared by licensor.

More impressive has been their ability to generate their own brands. Their biggest seller is Beldray a brand they bought out of bankruptcy for next to nothing.  There next biggest seller is audio/electronics own brand Intempo. Progress, George Wilkinson and Kleeneze have been recent brand bought out of bankruptcy and they are in the process of turning them into significant revenue streams.

Over 30 quality assurance staff on the ground in China. Years of operating experience has built a sophisticated process that they believe betters the operations of many big players (they would say that but I find the evidence to be persuasive its not hype).  They do not rely on 3rd party QA firms believing them to not be thorough and reliable.

Inhouse design and art team. Young workforce with a big local graduate recruitment scheme. People seem to make it up through the ranks and UPGS offers a genuine career path. Senior people have usually been there a long time so strong guidance for the youngsters. I guess there will be a reasonably high leaver rate over time. Not everyone can progress and there is likely a high degree of tedium to some of the tasks at the firm. The graduate program makes sense. The firm seem committed to being a good impact for local community.

They seem driven in what they do and want to make good product at reasonable price - they say John Lewis quality and feel at Asda prices and that every home regardless of wealth wants to have nice stuff. I don't see this as cynical aim. Showman and others come from humble backgrounds and I don't think they want to disrespect their ultimate end customers. Make of this comment what you will but I feel its important along with the graduate program in assessing UPGS, it durability and potential to become more than it is today.

Business is growing and diversifying become less reliant on biggest client B&M European Value Retail SA (LON:BME). B&M provided a real growth surge for UPGS 2014 thro 2017 as they provided product for their rapid expansion and store opening. Store opening are particularly good as new shops need full stocking. 2018 saw a pullback in revenue trajectory as tough times hit retail and orders slowed down.  Its nearly all branded product but approx 10% of UPGS business is white label. They don't really chase this as has poorer margin (note, they have a relationship developing with Primark supplying audio equipment - not sure whether this is considered white label).

UPGS don't operate with any ongoing supply agreements with clients so they will always be vulnerable to occasional sales disappointments. These periods can provide opportunities to buy the stock. The judgement and risk is whether there has been a structural business hit or something temporary. 2018 looked like a temporary rather than structural hit to me and that is why I bought. The significant positive of being an arms length supplier to customers is that keeps them entirely independent of margin pressure from retailers. Its better to keep margin at the expense of a bit more revenue.

Relationships have been built up over a long time. Founder Simon Showman can now get himself in the door at any UK retailer and they know that he can deliver what they want in terms of product, price and quality assurance.  Note, negotiating the process of being a supplier to the likes of Tesco, Asda, Sainsbury's, etc is hard and UPGS show high operational sophistication to be able to relate to so many firms with so many products. This suggests they have the capability to scale their operations over time and that there is not an early operational brick wall with growth. On site there wasn't time spent on the internal management systems - I'd have liked more insight on this but the indications that systems and management are good and capable of accommodating further growth. Obviously, super success means more investment over time but that's a good thing down the line rather than a problem.

The case for UPGS

  1. Cheap. With hinted pick up in sales H1 2019 its looking like FY2019 may get somewhere near 2017's peak. Trading update Monday 11 Feb will provide much more colour but I'm guessing they are on about 8x expected earnings at the moment with top line growing and leverage through to earnings
  2. Costs seem well contained so growth should feed margin expansion over time taking it close to or into double digit percentage in coming years
  3. Focused on their path to growth which is selling the current range of products (varying brands, shifting where they need to) into more places including internationally.
  4. Trading statement provides colour on Europe but the indication is that they have real traction there. Note, Action has been their second biggest client to date and they seem to be growing very rapidly across the continent (not just their Benelux origin) at I think a rate of 300 new stores per annum at the moment. This provides huge potential.  (Note, Action is 3i's biggest investment and I'm told 40% of their carry).
  5. In the UK there's scope to grow through relationships with independent homeware and appliance shops. They access through distributor arrangements. 
  6. Looking round their showroom its clear the stuff looks really great. It doesn't in anyway look like cheap junk.
  7. They have shown the ability to pass thro the tough compliance needs of big retailers and manage multiple complex relationships. This speaks to a capable, sophisticated and mature business for their size.
  8. They are reducing client concentration with growth.
  9. The business has moat. It is not easy to replicate the scale and sophistication of UPGS capabilities. Its not tangible 'intellectual property' rather extremely valuable and sticky intangible relationships and know how. Its the sort of thing that means that can displace others and build share with existing customers.

I think I have an investment in UPGS that I can hold for many years to come. There will be volatility as demand ebbs and flows from customers but some of this will be good volatility as they hit new significant relationships and build further products into existing relationships.

I don't have a price target or end point as there's still a lot of maturing for UPGS to do. I'm hoping to multi-bag over many years....if they retain focus and execution.

[Did the above quickly as trading update out tomorrow. So may return to add]


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UP Global Sourcing Holdings plc is a United Kingdom-based owner, licensee, designer, developer and manager of a series of brands focused on the home. The Company develops, designs, sources and distributes a range of consumer products, focused on six product categories: small domestic appliances (SDA), housewares, audio, laundry, heating and cooling, and luggage. Its owned brands include Beldray, intempo, Constellation and Progress, and its brands under license include Salter and Russell Hobbs. It also offers products under brands, such as American Originals, George Wilkinson, Giles & Posner, Inspire, Portobello, Prolectrix and ZFrame. It products are sold to a cross-section of both national and international multi-channel retailers, as well as other national retail chains. It sells its range of products to over 300 retailers across approximately 40 countries. The Company caters to retailers, supermarkets, general retailers and online retailers. more »

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6 Posts on this Thread show/hide all

rhomboid1 10th Feb 1 of 6

Great summary..I held but sold out when mgt refused to answer some basic questions...but they now appear to understand that being a public company involves connecting with shareholders

I think you’re correct in your assessment that they’re likely to do well..

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mojomogoz 11th Feb 2 of 6

In reply to post #445763

Well Rhom, fingers crossed...maybe one day you may see them as having a quality, repeatable, scalable and defensible business model and you will do your Tweet magic ;)

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rhomboid1 11th Feb 3 of 6

:) I must admit I’m kinda kicking myself for selling as I knew the international bit was going better than planned as they were recruiting for country managers for countries they hadn’t formally stated they were active in!

Did you attend the investor day last week?

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mojomogoz 11th Feb 4 of 6

In reply to post #445873

I did and it was useful. Met the publicity shy so somewhat paradoxically names Mr Showman CEO. I like him. He’s a genuine ground up entrepreneur. I have done many entrepreneurial things and been round entrepreneurs. I realise that whilst entrepreneurial I am not an entrepreneur...I don’t have that little bit magic that takes me through any and all brick walls and always believe I can do it. Showman is that. He’s nicely balanced out by MD Andrew Gossage who is the details and organiser guy. They’ve worked together for a long time and it seems to go well. Other seniors been there a while too. Seems to be genuine loyalty to task and company. My instinct is that they have a shot at doing something decently bigger than today. Really strong sense that they know who they are and how they are going to do it.

I don’t expect fireworks as it’s a northern business that doesn’t sell premium stuff in John Lewis. So, a bit like say SCS (LON:SCS), hard for affluent investors to appreciate. That said, there’s potential for Europe to move with surprising pace. Not a forecast by me but they are obviously excited by it and seeing a lot of opportunity.

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rhomboid1 11th Feb 5 of 6

Great background....many I also held SCS (LON:SCS) for a while..again took profits far too early after doing a couple of mystery shops which made me feel that it wasn’t my kind of investment...I keep both on my watchlist to remind of what I’m missing

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mojomogoz 11th Feb 6 of 6

In reply to post #445893

Land and expand is what they that means grind it out...they are focused on grinding it out when a door of opportunity opens. I referenced SCS as know you know it so it was a parallel for you. UPGS have upside opportunity more driven by top line growth. SCS top line growth a bit tougher but they are super cash generative and I do expect high earnings growth derived from cash (eg, they have 30 stores to open in tightly targeted locals when the right opportunity arises in right out of town park, or they could buyback perhaps once the retail uncertainty calms down). SCS cash generation should remain above earnings for foreseeable future as some old and expensive leases from over aggressive early Noughties expansion roll off.

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