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Shaking up business energy supply
To call Yu Group (YU.:AIM) fast-growing may seem at odds with its utility remit, but this is a unique company with substantial share price upside potential, in our opinion.
Yu is shaking up a large UK business energy supply industry distinctly lacking in options.
Still virtually monopolised by the big six, the company, which trades under the Yu Energy brand, is trying to leverage its flexibility, value for money and high-quality service proposition to wrestle business customers away from the clutches of dominant rivals.
This is a multi-billion pound market and a huge growth opportunity for Yu if it can execute. According to Ofgem data, about 90% of small and medium-sized enterprises (SMEs) are big six customers and a staggering 40% have not considered changing supplier in five years.
Part of the reason is that fixed term contracts are still enforced across the business energy supply industry. This contrasts with the consumer market, where customers can switch at the figurative drop of a hat.
With energy bills a big cost for SMEs, many are expected to diligently shop around when they come off contract. Yu is ahead of this curve, approaching potential clients through its own telesales arm or via third party brokers.
While the headline pre-tax profit in its first full year results (to 31 December 2016) since listing show pre-tax losses of a little more than £1.5m, strip out what should be one-off costs and the company made its first ever profit, worth £205,000.
Tellingly, Yu’s revenue performance of £16.3m comfortably beat Shore Capital’s £15.1m expectation, according to analyst Robin Speakman. Gross margins at 21.2% help underpin emerging profitability and cash flow.
Growth going forward could be eye-popping. Shore estimates revenue and pre-tax profit of £34m and £2.3m respectively in 2017, rising to £45m and £4.7m in 2018. This implies earnings
per share (EPS) of 12.6p surging to 23.5p.
There’s also a dividend growth story. It paid a maiden 2.25p full year dividend in 2016 and at least 3p is anticipated this year. The forecast is 5.6p in 2018 and 8.25p the following year. (SF)
Yu Group (YU:AIM) 287.5p
Stop loss: 230p
Market value: £40.4m