Small Cap Value Report (Mon 11 Feb 2019) - UPGS, AVAP, STR

Monday, Feb 11 2019 by

Good morning, it's Paul here!

It's a very quiet day for trading updates, and results.

Graham and I had a natter about some stocks in my portfolio, just after the market closed on Friday evening. Here's that podcast, which is a potentially painful 1 hour long. We continued chatting about Brexit for another 1.5 hours after that, but you'll be relieved to hear that Graham had switched off the red button before that started!

Incidentally, the picture that Graham chose to illustrate the podcast, of some people playing football, perfectly sums up my school memories of football - namely the player (in red) on the right, who is recoiling in horror, in a slightly camp way, as the football comes in his direction & he feels the pressure of having to do something with it. Yep, that was just like me;


UP Global Sourcing Holdings (LON:UPGS)

Share price: 65.2p (up 12.4% today, at 11:38)
No. shares: 82.2m
Market cap: £53.6m

Trading update

Ultimate Products, the owner, manager, designer and developer of an extensive range of value-focused consumer goods brands, announces the following trading update for the six months ended 31 January 2019 ("the period").

This company, which imports consumer goods from China, I think, was a very disappointing stock market float in March 2017. It floated at 128p per share. Note that the float did not raise any cash for the company, it was a sale of 50% of the company, raising £52.6m for the selling shareholders. I'm really not keen on this type of float, as they often seem to go wrong later.

Initially UPGS shares did well, and rose to a high of about 223p. Then came the (first) profit warning, in Sept 2017, just 6 months after floating. I really do think that selling shareholders should be legally required to repay some or all of the proceeds, if a share price collapses so soon after listing. Maybe listing proceeds should be put into escrow, and released gradually over say 3 years? Or have a clawback clause?

After languishing for a while, the share price has had something of a recovery recently, so this share could be worth a fresh look. People who…

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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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Avation PLC is a United Kingdom-based company engaged in leasing of aircraft. The Company is a commercial passenger aircraft leasing group managing a fleet of 47 aircraft, which are leased to airlines globally. The Company's fleet includes Airbus A220, A220-300 A320 and A321 narrow-body jets, Boeing 777-300ER and Airbus A330-300 twin-aisle jets, Boeing 737-800 NG, ATR 72 twin engine turboprop aircraft and five older Fokker 100 jets. It supplies regional, narrow-body and twin-aisle aircraft to the airline industry. It serves the commercial airlines. It owns, through its subsidiaries, a range of commercial passenger jet aircraft, which are leased to various airlines in Europe, Asia and Australia. The Company's subsidiaries include Avation Capital S.A., which is engaged in financing, and Capital Lease Aviation Limited and MSN429 Leaseco Limited, which are engaged in aircraft leasing. more »

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Stride Gaming plc is an online gaming operator in both the Bingo-led and social gaming market. The Company's segments include real money gaming and social gaming. The real money gaming segment focuses on bingo-led online operation, using its purchased software to provide online bingo and related gaming activities to players. The real money gaming segment operates in regulated markets, principally the United Kingdom. The social gaming segment provides players with entertaining applications and games internationally. The Company has over 143 brands. Its online bingo brands include Kitty Bingo, Lucky Pants Bingo, Bingo Extra, Jackpot Cafe, Jackpot Liner and King Jackpot. Its online casino and slots brands include Spin, Magical Vegas, Big Top Casino and Slots Bonanza. In addition, the Company is engaged in development of Panda Slots application, a multi-technology platform for the creation of mobile social slot games customized on a player level. more »

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  Is LON:UPGS fundamentally strong or weak? Find out More »

26 Comments on this Article show/hide all

matylda 11th Feb 1 of 26

Paul/Graham - It's an excellent audio, much appreciated, highly recommended to all who have not yet listened to it.

As Fridays are usually quiet, perhaps you could consider a 1 hour audio on markets/holdings instead - Would probably also be much easier on both of you time wise too.

Thanks once again to both of you for your time and sharing your valuable knowledge.

Blog: Briefed Up
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MrContrarian 11th Feb 2 of 26

My morning smallcap tweet: No wonder Windar was wilting

Connect (LON:CNCT), UP Global Sourcing Holdings (LON:UPGS), Windar Photonics (LON:WPHO), DCD Media (LON:DCD), Stride Gaming (LON:STR)

Connect Group (CNCT) new contract with Reach from October 2019 to 2024 to distribute Daily Mirror etc. Worth £220m PA.
UP Global Sourcing (UPGS) H1 trading: rev up 20.8%. Guides FY EBITDA above market expectations.
Windar Photonics (WPHO) FY18 trading: rev up 59% to £3.5m (prev guided €4 - 4.5m), EBITDA loss €0.36m (€1.22m). Order book only €1.0m (€3.9m). Component shortages hit H2 prodn, some orders deferred. Why has it taken months to warn?
DCD Media (DCD) guides FY rev only £7.3m (£10.2m) and £0.1m pretax. Current Q1 strong, Q1, with sales that were expected to fall into last year falling into the current year.
Stride Gaming (STR) confirms press reports that it is reviewing all strategic options including sale of group. Denies it was fined twice by the Gambling Commission last year, only once.

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LeoInvestorUK 11th Feb 3 of 26

UP Global Sourcing Holdings (LON:UPGS) - Unfortunately I halved my holding after the Equity Development note on 3/10/2018 which forecast a very modest recovery in FY2019 followed by medium term sales growth of only 5-6% which was a long way from my expectations of a significant snap back after well-advertised one-off factors and a return to 15-20% growth.

Following the unscheduled trading update in January it became obvious that business was progressing closer to my original expectations rather than ED's note. After today's update it seems this is down to a mixture of management guiding ED to be very cautious after multiple previous disappointments and also outperformance overseas.

With a PE under 10 and PEG around 1 before pending upgrade, good momentum (supported by management guidance that may remain behind the curve), and reducing debt, a recovery back over £1 in the next 12 months looks quite possible. Margins remain a concern, but hopefully they will report some improvement in their H1 results.

Edit: mojomogoz wrote this excellent update last night:

Blog: LeoInvestorUK
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Camtab 11th Feb 4 of 26

Graham, Paul, very useful thank you.I do like the way you bounce off each other. Clearly different investors, both with good insights. I know the story on Intercede now which is in your portfolio, Paul. I was quite pleased with last results which showed some progress under the new CEO, i recall revenues up 14% and costs coming down. However was surprised at the share price movement. Quite resoundingly down. I can see that the shares are tightly traded and so any seller will impact which is what I suspect happened. Have you heard anything else any where? But my question is this, i hadn't realised the institutions were becoming unwilling to fund small company raises. IGPs balance sheet isn't the strongest. Do you see this as being an issue?? All the best

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Carcosa 11th Feb 5 of 26

Today Avation (LON:AVAP) issued a Trading Update in which the key parts were:

Avation expects to report increased profit for the six months ended 31 December 2018, with both earnings per share and profit before taxation expected to be approximately double that of the comparable half-year period ended 31 December 2017. Revenue (unaudited) is expected to increase to approximately US$58 million (2017: US$52.4 million).

Mmmmm I sorta disagree! The business of Avation is aircraft leasing and therefore it is aircraft leasing revenue that I am interested in. The comparable figure of $52.4m is flattered by what I would claim is an exceptional figure of around $10m which was the recovery of maintenance reserve from an insolvent (Air Berlin) A320 so the comparable figure is actually $41.7m That means comparable lease income has increased by around 38%

So, lease revenue $58m v $41.7m (+38%)

We can work out H1 2019 lease revenues by calculating H2 2018 revenues and then adjusting for fleet changes in H1 2019 :

FY2018 Lease revenue $109m
Less H1 2018 Lease Revenue 2018 ($41.7m)
Less Air Berlin Maint. reserves ($10.3m)
Gives H2 2018 (June 2018) Revenue of $56.7m

So if no changes to revenue then H1 2019 should be $56.7m

But there were some changes:
ATR 72's (DAT) additional revenue ($0.59 + 0.24m) = $0.83m
A220's = ($1.8m + $1.6m) = $2.4m
A230 (Vietjet sale) loss of revenue = -$0.74m
Net change = $2.49m (i.e. additional lease revenue in H2 over lease revenue H1
= 56.7m + 2.49m = $59.2m ie. more than the TU today of "approximately US$58m"

The difference can be due to around $0.1m in EUR/USD exchange (the DAT ATR72 aircraft)
Timing issues in my calcs ~$0.2m
Me just getting lease rates wrong ~$0.5m
So I end up with $58.4m

So where is the revenue being recognised from the A320 Vietjet aircraft sale? So I bunged an email to Avation and got it confirmed that the revenue does not include the Viet Jet sale. i.e. there will be even better news when the results are released namely;

Lease revenues +35 to 39%
Additional 'profit' on Vietjet aircraft which are claimed to be substantial  and ny that I would say anything between ($1.0 and $3.0m)

For the avoidance of doubt I have been a multi year shareholder in Avation and visited them in Singapore a while ago. It is my number 2 shareholding. I consider Avation should be a long term share holding and should be valued at NAV or above. EPS and Profitability can be massively skewed year on year by one-off transactions which, whilst perhaps is useful for short term traders holds little appeal to me. The business is about bringing in more aircraft every year. Avation are an absolute minnow in the aircraft leasing world. Tiny, and as such gives them capacity to make substantive increases in NAV. Currently one of the most exciting things about Avation is there activity in the A220 (ex Bombardier C300 series aircraft) which are being procured at exceptionally low cost and I forsee in 5-7 years will provide significant increases in aircraft valuation and hence NAV as the aircraft proves itself in service. But again this is a multi year outlook. I often post about Avation on the Lemon Fool (and here) 

I consider the current share price to be reasonable value.

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DMG2305 11th Feb 6 of 26

Paul, Graham,

Excellent podcast, really insightful and a pleasure to listen to.

Keep up the great work.


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 Are LON:UPGS's fundamentals sound as an investment? Find out More »

About Paul Scott

Paul Scott

I trained as an accountant with a Top 5 firm, but that was so boring that I spent too much time in the 1990s being a disco bunny, and busting moves on the dancefloor, and chilling out with mates back at either my house or theirs, and having a lot of fun!Then spent 8 years as FD for a ladieswear retail chain called "Pilot", leaving on great terms in 2002 - having been a key player in growing the business 10 fold. If the truth be told, I partied pretty hard at the weekends too, so bank reconciliations on Monday mornings were more luck than judgement!! But they were always correct.I got bored with that and decided to become a professional small caps investor in 2002. I made millions, but got too cocky, and lost the lot in 2008, due to excessive gearing. A miserable, wilderness period occurred from 2008-2012.Since then, the sun has begun to shine again! I am now utterly briliant again, and immerse myself in small caps, and am a walking encyclopedia on the subject. I love writing a daily report for on most weekday mornings, constantly researching daily results & trading updates for small caps. Cheese! more »


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