Paul Scott Stockopedia comments. - YU31 May 2023 21:34
(FOR TREK)
Paul’s opinion - the key question for investing in any company is: “Are profits sustainable?” My concern with YU is that pre-energy crisis, in most years it made losses. We then have the current energy crisis, and YU’s profits soar, yet most of those profits have to be written off as bad debts. Leaving only £5.8m remaining profit in 2022, a very low margin of 2.1% of revenues. So credit risk is my main concern, that seems to be handled very badly. Supplying electricity to companies that can’t pay for it, is not good business. Maybe that’s an improvement opportunity, if you want to see the glass half full?
Secondly, I worry about the volatility of energy prices, and the contract risk of agreeing fixed prices with customers, and what hedging is necessary? The figures suggest to me that this business is very high risk, and could go bust if management make serious errors over their hedging strategy. Why would I want to take that investment risk? So investors here need to be all over that issue, and to strongly believe that management are safe hands to hedge safely in any possible scenario. It’s good to see that the Chairman’s statement focuses strongly on this point -
CHAIRMAN'S STATEMENT
Delivering high growth, shareholder returns, innovation and expert risk management.
· Maintaining a steadfast commitment to "best-in-class" corporate governance as we scale the business to meet our highly ambitious targets in a £50bn+ market.
· An experienced, seasoned board and a highly resolute, expert management team have continued to thrive and continued to deliver impressive results in the face of multiple "Black Swan" challenges.
Overall then this share looks high risk to me, and I don’t know enough about the sector to want to get involved. The large bad debt provision suggests to me that management are not very good at risk management actually.
The bumper profits are probably due to the chaos in energy markets, which has worked out well for YU so far. Can we guarantee that will continue? Will profits evaporate back to breakeven again, when energy markets return to normal (which will happen, we just don’t know when)? Although it sounds like YU has a pretty good outlook for 2023, and maybe 2024, what about after that though? Nobody knows what energy markets are likely to do, and the good luck it's had so far, could reverse, who knows?
Maybe it’s best to see this as a speculative share, and bank some profits on any future big share price rises? It looks risky, and a bit one-offy (recent profit growth fundamentally due to a temporary energy crisis) to me. But as always, good luck to holders, and let’s hope you do well on it. Do we have any sector experts in the house, who can give a more informed appraisal of YU? My conclusion is purely that I don't like the risks, and I'm not making any predictions on how it might perform in future, because I don't know.
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