Interactive Investor

Fifth profit upgrade extends Yu Group share rally to 260%

24th January 2023 15:32

Graeme Evans from interactive investor

This AIM listed company is growing so fast the management team can hardly keep up, forced to raise expectations time and again over the past year. Our City writer explains why the shares could go even higher.

A red-hot AIM stock whose valuation has jumped by over 260% since the start of October today said it was now in the “fast lane of growth” after a record-breaking year of five profit upgrades.

Yu Group (LSE:YU.), a supplier of electricity, gas and water to business customers, sent its shares up another 57p to 695p as chief executive, founder and major shareholder Bobby Kalar hailed a “fantastic” 2022 performance and forecast continued high organic growth this year.

Its shares rank third among the best performing on AIM since the start of the stock market revival in early October, beaten only by Velocity Composites (LSE:VEL) and Zanaga Iron Ore (LSE:ZIOC). Other high-flyers up by 150% or more over the same period include the recovering online bathrooms supplier Victorian Plumbing Group (LSE:VIC), as well as MusicMagpie (LSE:MMAG) and Harland & Wolff Group Holdings (LSE:HARL).

This year’s surge for Nottingham-based Yu takes the stock nearer to where it was prior to 2018’s discovery of accounting issues, when it admitted that data, financial and systems processes had not kept up with the requirements of a larger business.

Shares listed on AIM at 185p in 2016 and topped 1,200p in early 2018 but ended that year back closer to 50p. The rebuilding of Yu’s valuation has since gathered pace on the back of upgrades to 2022 guidance in March, July, September and November of last year.

The fifth upgrade was delivered today, with Yu’s trading sweet spot reflecting strong demand as well as support from its commodity hedging and “digital by default” strategies. Full-year revenues are now set to exceed £275 million, an increase of over 76% on 2021.

Kalar admitted today that Yu may have underestimated the accelerated contribution its strengthened business would have on financial metrics, leading to record revenues, profitability and forward contracted revenues all being above management targets.

A strong cash position means that Yu now expects the resumption of dividends through a modest” payment alongside the forthcoming 2022 results.

Kalar added that Yu started 2023 with “very strong” visibility based on £246.8 million of contracted revenues, up 57% on the prior year. He expects a further boost as the recent softening of forward commodity markets encourages customers to lock in new contracts.

The company’s Yu Smart division is also now fully operational, providing nationwide coverage of smart metering services that is expected to scale up profitably in 2023.

House broker Liberum believes there’s potential further upside for shares after upgrading its target price from 717p to 782p in the wake of today’s update.

Analysts at SP Angel have a new target of 940p, up from 635p previously. They added: “Initiating a dividend is a strong indication of growth in future cash flow generation by the board. Overall, we believe there is still significant upside potential in this stock for investors, on a de-risked basis.”

Major shareholder Kalar is a former electronics engineer at Marconi who started Yu after working in the care home industry, where he was exposed to the issues of energy cost management faced by small and medium-sized enterprises.

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