Ultimate Products: Equity Development
Ultimate Products announces today that sales revenue fell by 7% in its FY2024 third quarter and is anticipated to remain in negative territory in Q4. As a result, the company believes that EBITDA will now be in the range of £17.5m to £18.5m compared with a current market consensus figure of £21.5m. However, current sales setbacks look likely to prove temporary. The company clearly states its confidence in the group’s prospects for FY2025 as a whole.
Today’s announcement prompts us to cut our forecasts for both FY2024 and FY2025 sales revenue, and EBITDA as well as our estimated fair value for the shares. We reduce our FY2024 sales forecast from £167m to £157m, which implies a 6% decrease, and EBITDA from £21.6m to £18.0m. Given the 17% cut in current year EBITDA expectations it seems prudent to adjust our fair value / share figure by a similar amount. So, we reduce it by 20% from 250p to 200p.
Today’s statement cites a slowdown in intra-month sales from landed stocks which includes call off, regular stock and online sales, all of which reflect a broader slowdown in retail sales to customers. UP also highlights previously referred to overstocking issues which it cites as easing sufficiently to allow for the resumption of more normal ordering patterns from its customer base. The company’s retained confidence in prospects for FY2025 is encouraging for a return to growth.
Moreover, the forward order book for FY2025 is seeing significant growth relative to FY2024. As a result, we expect the growth rate to resume in FY2025 to as much as 9%. Our underlying sales revenue assumption is for 6% annual growth. To match our expectations in FY2025, the growth rate relative to the arguably more normal FY2023 would only have to compound at 2%.
UP’s core franchise values and investor attractions remain intact despite recent disruption. The company generates around two thirds of sales from the Beldray and Salter brands and continues to work on the improved messaging around these two important homewares goods names. Additionally, the business is structured as attractively capital light, due to outsourced manufacturing with positive implications for return on net equity and free cash flow.
The reduction in our fair value from 250p to 200p should be seen as a prudent measure. Furthermore, despite the reduction in today’s forecasts, UP’s valuation relative to peers continues to look attractive. The company’s yield is above its peers and the prospect of ongoing share buybacks should also be supportive, in our view. Both are symptomatic of UP’s cash generative nature
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