Interactive Investor

Two hot small-cap stocks make big moves after latest results

14th March 2023 15:39

by Graeme Evans from interactive investor

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One of these companies was up almost fivefold since last summer and the other had risen 20% in 2023. Here’s what happened once their results were published.   

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The stunning run for one of AIM’s hottest stocks came to an abrupt halt today, despite its boss seeing no let-up in the “exceptional performance” that led to record 2022 results.

A run of five profit upgrades and a progressive dividend policy due to start from June helped Yu Group (LSE:YU.) shares to surge by 250% between mid-October and early March.

However, the stock is now back where it was in mid-January as annual figures from the supplier of electricity, gas and water to business customers led to a bout of heavy selling.

The results showed revenues topped £275 million and pre-tax profits rose 72% to £5.8 million, driven by Yu “shaking the tree” as an agile and leading challenger to the more established and larger market participants in a £50 billion plus market.

Chief executive, founder and major shareholder Bobby Kalar said: “We pride ourselves on bringing innovation to a benign market, underpinned by our digital by default approach. This continues to provide differentiation for the group.”

He added that Nottingham-based Yu had got the new year off to a “fantastic start”, but with no fresh upgrade to guidance and 2022’s bad debt provision up from 3.1% to 7.7% of revenues the company’s shareholders opted to lock in profits.

The sell-off came despite house broker Liberum today increasing its price target from 782p to 900p, noting that Yu’s earnings visibility should get a further boost as more firms lock in contracts when the government reduces energy support from April. The City firm also expects the bad debt provision to reduce to 6.3% this year.

The shares listed on AIM at 185p in 2016 and topped 1,200p in early 2018 but ended that year closer to 50p after Yu admitted that its data, financial and systems processes had not kept up with the requirements of a larger business.

The rebuilding of Yu’s valuation since those accounting issues has gathered pace on the back of upgrades to 2022 guidance, with the company now in a position to restart dividend payments through a “modest” 3p a share on 20 June.

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

Among other high-flying small-caps reporting results today, Costain Group (LSE:COST) maintained its recent momentum as the infrastructure projects business produced better-than-expected figures.

The All-Share stock rose another 2.45p to 47p, up 37% from 34.2p seen in November but well short of the 300p seen before the 2019 profit warning that signalled a downturn in fortunes.

In a sector where cash generation is key, Costain’s end-of-year balance of £124 million was well ahead of Liberum’s £100 million forecast and the £96 million at the half-year stage.

The company, which serves the UK’s energy, water, transportation and defence markets, said the improvement reflected working capital management as well as operating profit growth of 20.6% to £36.3 million.

The margin stood at 3% in the second half as volume increases and operational improvements were offset by inflationary impacts. However, Costain is looking for a run-rate of 3.5% during the course of 2024 and 4.5% in 2025.

Chief executive Alex Vaughan said: “We are seeing good opportunities emerge in our chosen sectors, at margins we aspire to.”

Costain has good visibility for the current financial year, with more than £1 billion or 80% of expected revenue already secured and a strong pipeline of growth expected from secured and preferred bidder frameworks.

Peel Hunt has an “add” recommendation and 60p price target, while Liberum sees the potential to reach 80p.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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