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Universe Group (LSE:UNG), a developer and supplier of payment and on-line loyalty systems, is a long-running, and long-running disappointment of a, recommendation from my past. I apologise to those who have lost money in the shares over the years due to me. Management cocked up and I should have bailed years ago, having tipped the shares at 41p in 2001. I got it wrong and am sorry for that. However, the shares have recovered from lows of 1.25p at the start of this year to a current 2.75p (capitalising the company at £5.2 million). Could there be further recovery ahead? An analysis of the company’s results and statement for the first half of 2012, released last month, suggests there could be and this is why…
The first half 2012 calendar year results showed an adjusted pre-tax profit of £0.448 million, up from £0.144 million in the corresponding 2011 period, on revenue 6.4% higher at £6.02 million. Gross profit was nudged 3.8% higher and underlying administrative expenses were reduced by 10.3%. The performance saw the net current liabilities position improved by £0.391 million (to end the period at £0.165 million), with non-current liabilities increasing by £0.172 million (to £1.27 million). Net debt at period end stood at £1.05 million.
The company emphasised that the numbers showed that a restructuring and realignment completed in 2011 by a new management team beginning to bear fruit and that it was “confident that the group will continue to improve its performance and remain optimistic about the prospects for the full year”. This optimism is partly the result of a net £1.57 million August placing – which has enabled the company to retire its expensive debt, invest to enhance its competitiveness in its traditional petrol forecourt market and to position itself to address a wider retail environment.
The new funding is key here – Universe has for a long-time looked to have strong development potential but has been restricted by its balance sheet position limiting its access to prudent growth capital. This should no longer be the case – with it emphasised in the results statement that the new funds will “strengthen the balance sheet and give the group access to more‑favourable banking terms”.
The company’s house broker, FinnCap, noted that the results “substantially de-risked” full-year forecasts – with the numbers delivered representing 48% and 56% respectively of anticipated full-year revenue and EBITDA. With the strengthened balance sheet, I believe the company now capable of generating £1 million in annualised pre-tax profit – FinnCap currently has £0.9 million penciled in for 2013, though noting “the momentum of a refreshed product set offers the opportunity of unmodelled performance upside, we look forward to realistic significant share price performance”. Given historic losses, tax won’t be an issue for many years. Finn Cap’s initial target price for the shares is 5p – which would capitalise the company at £9.4 million. Considering the current profit run-rate and release of the balance-sheet rooted shackles on the company’s future growth potential, I would argue this not unrealistic. At the current 2.75p, the shares thus look to be worth a flutter at this point. If you can almost double your money on averaging down you should compensate for the ghastly losses on my original tip. Don’t bet the ranch but a small flutter looks like a good idea.
problem with this share is the HUGE bid/ask spread. You’re making a loss way before even starting
The problem is the lack of liquidity in the share, you can’t buy or sell very many without paying over the odds / receiving under the odds. I like the story, I like the new management and I would buy some more if it was not for the liquidity issue. I do not know how a company solves that problem. I know they are aware of it. Issuing more shares does not seem to help. In someways it is good that the people who subscribe for all the placings have not wanted to sell their stake or even trade in and out with some of it, but by tightly holding the shares they are preventing a decent market forming.