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Shares in AIM-listed payment and on-line loyalty systems company, Universe Group (LSE:UNG) are an award winning disappointment of a share tip from my 12 years founding and running t1ps.com. Once again I can only apologise. However, I updated readers of this website in October – with the share price then at 2.75p – suggesting that, having already recovered from lows at the start of the year of 1.25p, there could be further recovery ahead and it was time to average down. Now at 3.75p, the following updates my view following a trading update released yesterday…
Click here to read my previous update on Universe Group
The trading update noted that, for 2012, the company expects to “report profitability ahead of market expectations” due to early fulfilment of orders, an advantageous sales mix and improved internal efficiencies. It also “remain(s) confident of our prospects for next year” as a successful £1.57 million net placing in August has facilitated investment in new products and services to reinforce competitiveness and extend the company’s reach into wider markets. The positive announcement supports the company’s interim results assertion that a restructuring and realignment completed in 2011 by a new management team is beginning to bear fruit and the view I expressed in my October update that the new funding was key here as the company has for a long-time looked to have strong development potential but has been restricted by its balance sheet position limiting access to prudent growth capital.
At the interim stage the company produced a pre- and post-tax profit of £0.404 million – historic losses mean tax shouldn’t be a feature for a good while – and more than this now looks realistic for the second half contribution (house broker finnCap having had a £0.7 million profit pencilled in for the year following the 13th September announced interims). Following this and my previous update, Universe has announced it has entered into an agreement to sell its Contract Electronics Manufacturing division for £65,000 – with completion expected on 20th December and the buyer also undertaking to purchase inventory from Universe, as and when the buyer requires. This business has been long supplanted by managed software solutions for payments and loyalty programmes as Universe’s core business and generated a gross loss of £41,000 in the first half of 2012 (on revenue of £0.65 million), after a gross loss of £43,000 (on revenue of £1.63 million) in 2011.
As such, the sale should further enhance earnings and I am thus even more confident in the view I expressed in October that Universe should now be capable of generating £1 million in annualised pre-tax profit. With the Summer fundraising and recent trading meaning the current balance sheet should be in decent shape (at the half year net debt was £1.05 million, with net current liabilities £0.17 million and non-current liabilities £1.27 million), I continue to believe the share price – which currently capitalises the company at little more than £7 million – fails to fairly reflect the emerging operational recovery here. I continue to target a 5p share price for starters.
Tom Winnifrith is a speaker at the UK’s top investor show – The UKInvestor Show, which takes place on April 13th in London. Around 80 growth companies will be presenting and speakers include men who really can be called a master investor such as Nigel Wray, Mark Slater, Evil Knievil, Dominic Frisby, Nick Leslau and Lucian Miers as well as UKIP leader Nigel Farage MEP and Christopher Booker. For details of the full speaker line up and to book a free ticket click here
