Stockopedia comments Paul Scott - YU23 Feb 2024 14:07
Paul’s opinion - I’ll do bull and bear -
Bullish view - this certainly sounds an interesting announcement today, I can see the benefit from releasing all that collateral cash. It also suggests that Shell must be comfortable with YU, to not require collateral.
On the upside, YU has produced stellar growth during the energy crisis, with profit soaring -
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Broker upgrades have been astonishingly good -
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Valuation on a PER basis is still more than reasonable - the StockReport shows a forward PER of only 7.1.
Bearish view - all the profits have come from the energy crisis, it made next-to-nothing beforehand. The number 1 question to ask for all investments, is “are profits sustainable?”. IF they’re not sustainable, then buying a cheap PER share that’s enjoying a temporary bonanza in earnings, could turn out to be an expensive mistake.
YU has previously come unstuck, and with the whole business model resting on management making correct (and sometimes lucky?) decisions on purchasing and selling prices, plus the all-important hedging. If they get that badly wrong, it could be disastrous, and how many management teams always get their hedging right? Hedging is meant to tie selling prices and buying prices together, to give guaranteed profit whatever happens to market prices, but how many companies actually hedge perfectly like that?
My previous concerns with YU’s accounts was a huge bad debt charge. It seemed to be selling electricity to small businesses that couldn’t pay their bills. That’s not good business! I think YU was addressing this issue though, so that might be OK now, it’s just something to check.
Overall - I can see why some investors will be excited about the superb performance YU is currently producing. Equally, I can see why other investors might see this as a flash in the pan, with super-normal profits likely to be competed away as markets normalise.
As I don’t know what the future holds, I’ll just sit on the fence with AMBER, but well done to bulls, it’s certainly been a terrific share so far.
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