Why I’d sell 10% yielder Conviviality plc to buy this soaring growth stock today

A profit warning sent Conviviality (LSE: CVR) shares crashing on 8 March, down 60% on the day.

EBITDA at the owner of Bargain Booze and Wine Rack now looks set to come in around 20% below market expectations, due to a couple of issues.

There had been a “material error in the financial forecasts” for the firm’s Conviviality Direct business, which means a £5.2m hit to EBITDA — and margins at the business have been weakening.

Predicted net debt for the year remains in line with previous guidance of £150m.

The share price is now down a massive 75% since the start of 2018 — and as my colleague Roland Head observed, the company’s directors bought a shedload of shares just after Conviviality’s first-half results.

Debt worries

Normally, that would make me think the shares were oversold and possibly cheap now. But a further update on Wednesday has made me seriously doubt that — and it’s all to do with that debt figure.

Conviviality assures us that it is “currently in compliance with its banking covenants” which, among other things, require the company to maintain covenant debt at less than 2.5 times the last 12 months adjusted EBITDA. That could now be coming under pressure, and the firm has engaged PwC to assist in discussions with its lenders and with HM Revenue & Customs. 

Dividends were forecast to yield 9.6% this year, rising to 10% by 2020, but I’d say they’re almost certain to be slashed now. Conviviality is in bargepole territory for me, at least until the current mess is sorted.

Stunning growth

I might not buy tumbling Conviviality shares, but I do like the look of Yu Group (LSE: YU) even after its share price has more than trebled in the past 12 months.

It’s certainly one I’d love to have bought a year ago, but is there still growth left in it? I think so, and news of a successful placing of 1.2m new shares does boost confidence. Priced at £10 for a modest discount to the market, the result has been a small dip in the share price. 

The independent energy supplier is still only a small fish in a big pond, and though 2017 revenue almost trebled to £47m, that’s a tiny amount compared to the big players in the market. And we’re already looking at healthy profitability, with an adjusted operating profit of £3.1m.

Only just starting

I see room for a lot more expansion, and consumer sentiment does seem to be swaying away from the big firms at the moment. I’m also minded of the success achieved by Telecom Plus, which offers all-in-one energy packages under its Utility Warehouse brand — Telecom Plus has been strongly growing its earnings for more than a decade.

Looking at growth fundamentals, Yu does seem attractive. Prospective P/E ratios are high right now, but forecast earnings growth of nearly 60% this year followed by 45% next year would soon start bringing them down. And PEG ratios of 0.7 to 0.8 look very tempting to me.

I do wonder why the company is already paying a dividend when it’s raising fresh capital. Long-term cash is an attractive feature of Yu’s dividend strategy, but I reckon it could have safely waited another year while accumulating cash.

But that’s not enough to put me off, and I see a long-term buy.