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I think we are getting our wishes mixed up with what BK wants. If BK wants some cash then there will be a special dividend, if he doesn't want to make any big purchases then a share buyback would probably send the share price up more than the special dividend. The two options are not one or the other. There is no reason why they couldn't return say £5m in a special dividend and do a £5m share buyback.
What do you do with £55m-£60m of cash at the year end? Dividends can only be paid out of retained earnings. Yu Group doesn't have very significant retained earnings at the moment. One gets the feeling that the management is frustrated that their current business performance is not currently reflected in the share price. If I were a betting man, then I think we could see a reasonable share buyback, (if the price remains around current levels.) This would reduce the number of shares in existence and increase the EPS of the remaining shares. I don't think at the current level the company can find a more attractive purchase than purchasing their own shares. Yes, this makes the current shares more scarce, but it would certainly send the share price significantly higher. Imagine if the company tried to buy 1m shares in the market?! (>£600m Yu bet!!)
Back in 2019 when the hedging agreement with Smartest Energy was signed, Yu Group was a £30m market cap company and had around 9,000 meters. The agreement comes to an end at the end of 2024, at that time Yu Group could have a market cap of >£600m, (in my opinion,) and over 100,000 meters. Smartest Energy will want to keep the business, but Yu Group will be in a much stronger negotiating position. If Smartest Energy do win the tender again, the terms will be much more favourable to Yu Group. There will be other companies invited to tender. The hedging business will be placed with one of 7 or 8 companies. They will have clearer visibility on the longer dated hedges and this will result in a higher margin for Yu Group. This is an opportunity NOT a business risk.
12-14 people attended the day, I think 4 were from Liberum. One gets the feeling that Average Monthly Bookings are doing well, and one gets the feeling that the number of new meters being added is really quite significant. The team left me with the feeling that there was significant traction in winning new business. I am more confident than ever that Liberum's numbers need refreshing. People will have to do their own research, but my revenue figures are being updated to 480-500m 2023, 750-800m 2024 and 1.2-1.3bn 2025. I know the company will want to keep the upgrades going, and I don't expect to see numbers moved up to those figures in one go. But those figures are where I personally think they could get to. On the day, it was the managers that report into Bobby and Paul that did all the presentations. It was very clear how, capable and excited these people were. The business is definitely going places. The big 6 are far too big and bloated to worry that they are losing some market share.
Is 100,000 meters achievable in 2024? If the momentum from 2023 is carried into 2024 my feeling is that this figure will be exceeded. The company have the excited and incentivised people to go beyond this number over the next 12-13 months. They also have the space to take on any additional people they may need to achieve it. It is just my opinion but I think that close to 60,000 meters at the end of 2023 maybe something that could happen. The larger clients have more meters and now that the company is bigger, and has a stronger balance sheet they are able to go after the bigger players (obviously, the larger the client the more competitive the margin has to be!) Maybe, this is why Liberum are guiding the net EBITDA margin down from 7.8% currently to between 5.5-6.5% in future years.
One of the areas I was concerned about was the macro environment, we find ourselves in. The possible effects that could have on bad debts and therefore margins. Fears no more! As is mentioned in the Liberum note the team is so focused on getting things right. They ensure billing is correct and therefore the amount of bills that are contested is low and incorrect bills is the main reason clients don't pay. Due to the client engagement problems are fewer and sorted out quickly. If anything cash conversion is improving not deteriorating. Yu Group is also now getting larger clients, some of their customers are household names and national companies. They are not a pub and a kebab shop!! The company is also offering a different type of contract that is attracting larger use clients and government bodies. As well as a fixed term contract that is for a fixed for say one, two or three years and fully hedged from start to finished they are now offered another contract that the customer can forward buy the next two months, but then may only be hedged 50% for months 4 to 10 and 25% hedged for months 10 to 15. They then buy energy and increase the amount hedged as and when they want to dip into the market, giving the client complete flexibility over the period they are contracted. The increase in the larger clients that have better credit histories is also helping reduce the chance of a debt going bad. Yu's clients are so closely monitored by their excellent Client Relationship Software that they are very quick to spot anything going wrong and they are very good at working with clients to get better results. The software they have is improving the cash conversion figure and with it being 98% in the first half, it would not be a big surprise if this figure actually improves in the second half! Again most of these comments are reflected in Liberum's note this morning.
Cheers IPC, there is just one question that hasn't been mentioned that I will be putting forward, and that relates to cash conversion, I am keen to find out if they are still running at the 98% figure or if that has slipped. (Hopefully, if it has, it is only very slightly.)
Thanks Sparky, I would be happy getting a straight answer to any of those questions. I am sure it is the sort of areas that a lot of people will be directing their questions. I think that the company are not going to want a Institutional Investor day were they can't answer those type of questions, and that is why I think if there is going to be freedom to speak there should hopefully be a trading update tomorrow morning. Just my thoughts!
I am indeed going through work. The 100,000 meters is on my list. I will also get the opportunity to ask senior management what their view is regarding the meter target. My personal view is that if we are getting a TU this November, I would expect it to drop tomorrow at 7am. If not I think it is unlikely.
Just to update, the Institutional Investor day has been moved from the 14th to the 21st November. The reason according to Liberum is because there were too many other investor days going on, on the 14th. Last years trading update was Monday 28th November. (Just saying!)
I feel it is significant that it is Liberum sitting on the offer. They are the house broker. They are hovering up whatever they can get hold of and then bundling it up and moving it on in the auction everyday. They are clearly filling some pretty good sized orders at current levels, once the sells dry up at this level it will move up until they find the next level people are prepared to let some go.
I know we have gone up 1350% in 3 years. As a PI that is what people see, which is clearly fact. However, the under lying fundamentals mean this is stand out cheap at a soon to be historic P/E of just 8.5x. Institutions are looking at that and the projected growth in revenue and getting very excited. Because of Institutional screening, this is just popping up now due to the market cap and they like the look of the growth on such a low starting p/e. They are not bothered where it has come from. It's where it's going that is getting them to put buy orders in at £12.30, which PI's are struggling to get their heads around, and don't even mention Andy Munchkin!!!!
You're welcome Sparky, I thought you would be pleased! Just shows you, 3 years ago today we were 90p. However, now we are over £200m market cap the institutions can start looking at us. They can't believe they can buy a defensive company with our growth prospects for 8.5x historic P/E in 11 weeks! That will double revenue in two years and increase net EBITDA margin at the same time. Swimming in cash. I know we've come a long way, but this is a new opportunity for institutions now the market cap allows them to own it. The future will be very bright, little in their universe as good as this. However, given many of the PI holders have made so much over the last 3 years, the size of their holdings are now so large they are feeding the thirst of the big boys! Some will miss out on the ride from 8.5x to 16-20x p/e. imagine the price at 16-20x p/e on 2024 and 2025 eps! People just don't believe that the share will get there but patience will be rewarded.
In case anyone is interested Liberum are doing a site visit for Institutions to Yu Group head office on the 14/11/23. This will include meeting BK and PR (CEO & CFO) and a walk around the office. They will discuss how thing are done and how the Digital by default works. More PR as promised by BK in the IMC presentation. Maybe, just maybe we may get a trading update prior to the site visit, so that the management is able to talk more freely to the Institutions?? Fingers crossed!
In fact what I find even more strange is that SME's are using brokers to find energy deals. The can go on Digital-by-default and get their own quote in 30 seconds!! Why pay a broker 0.5-2% for doing exactly the same thing? I think they said around 70% of Yu's business comes through brokers........Madness!!
SNN, I agree that the cost to serve will go down and it maybe that the EBITDA margin rises above 7%, in fact we are probably above 7% this year. I am just wondering if with a meter target of 100,000 by the end of 2024 if they are going to offer the brokers a slightly higher % of the referral value than 0.5-2% in order to gain market share, this could get them to where they want to be quicker but maybe need to sacrifice a little bit of margin? Also, the Liberum note see's the margin % decreasing in future years, and this could be the only reason why the margin % would fall when the revenue is flying and the cost to serve would theoretically reduce with size.
Sparky the big boys are loading up because they are coming to it with fresh eyes now that we are a £200m company. They see the 8.5x p/e and the rate of growth based on the Liberum note of the 29th Sept. They would assume that with the growth rates predicted then a company with similar growth could be on 24/25x pe. They probably can't believe they can buy the growth so cheaply. You must remember this company is now cheaper than it was 5 years ago at £12.30! This is what a PI can't get their head around how can a company go from 50p to £12.30 and then be cheaper than it was at 50p??? It does take a little getting ones head around. However, that is what we have got here! Now the company is the size that it is Institutions will pick up as many as they can at this price. They will probably offer BK more in the future to reduce his stake and increase the free float.