Higher online sales help UP Global Sourcing’s margins

Kitchen and homeware specialist UP Global Sourcing (UPGS) has taken a defensive position on price increases in this inflationary environment – prices were kept steady in the period in a bid to incentivise demand as cost of living pressures hurt discretionary spending. This contributed to the flat revenue performance.

But at a more granular level, this was very much a tale of two divisions. Sales to retailers – by far the company’s biggest revenue driver – fell by 11 per cent in the half to £65mn. These sales were “hampered by caution in forward ordering arising from post-Covid overstocks amongst retailers”, according to management. Online sales, on the other hand, jumped by 78 per cent to £23mn against a comparative hit from shipping disruption, helped by improvements to these supply chains and higher demand for energy-efficient products.  

Higher online sales benefited gross margin, which was up by 30 basis points to 24.7 per cent. But flat cash profits highlighted the challenge of cost pressures, with administrative expenses up by 8 per cent.

The shares were marked down by 5 per cent by the market, despite the raising of the dividend, as it digested lower profits. The bottom line was trimmed by higher interest rates, which almost doubled the company’s finance costs and head office investment, bumping up depreciation and amortisation charges by a fifth.

House broker Shore Capital said that “we see a materially undervalued equity that should handsomely reward the long-medium-term investor”. The valuation is in our view undemanding – the shares trade on a consensus nine times forward earnings, according to FactSet, below the five-year average of 11 times – but there is nothing material pushing us towards an upgrade. Hold.

Last IC view: Hold, 154p, 29 Apr 2022