The Yu Group (LSE:YU) share price has been on fire this year. In the space of a few months, it has more than tripled. And over the last 12 months, the Yu share price has increased from 67.5p all the way to 357p today. That’s a surge of more than 400%!
What caused this impressive growth? And should I be adding the company to my portfolio? Let’s take a look.
Beating market expectations
The company recently released a trading update that showed some promising results and is likely the primary catalyst for Yu’s surging share price. While no exact figures were published, the independent utility company expects full-year revenue to be north of £100m, beating market expectations. Similarly, underlying profits are also on track to be significantly ahead of expectations.
What’s more, the firm has already secured an additional £93m of revenue for 2021 at an improved gross margin through existing customers. And despite the disruptions from Covid-19, it was able to increase its cash position by £9.3m without borrowing any additional capital through loans.Â
In my opinion, the company appears to be doing brilliantly, so seeing the Yu share price surge on this report is not too surprising.
Risks to consider
Yu group is a gas, electricity, and water provider for small and medium-sized businesses. And while the UK business-to-business utility market is growing rapidly, it is a highly competitive and regulated space. Combining that with fluctuating commodity prices means that the firm has virtually no pricing power over its services.
Therefore to grow the business, Yu is focusing on acquiring new high-margin customers while simultaneously closing contracts with low-margin legacy customers. Unfortunately, this has also led to customer retention suffering considerably. The firm has reinstated its strategy to maintain a minimum 70% customer retention rate from now on. And with £93m of revenue already secured for 2021, it appears that this goal can easily be achieved. But this may not actually be the case. Let me explain.
Yu’s average customer contract length with its customers is approximately 22 months. This means that the acquired clients from 2020 have yet to decide whether they will renew their contracts with Yu. Therefore it is quite difficult to judge what the current level of customer retention is today, and it could be well below the 70% target. Suppose the business cannot convince its new customers to stick around after their contracts expire at the end of this year. In that case, revenue for 2022 could suffer considerably.
The Yu share price: time to buy?
Over the last three years, Yu’s top-line revenue has increased by an average of 56% annually. Needless to say, the company is growing at an exceptionally rapid pace. And with a price-to-sales ratio of 0.46, the Yu share price does look cheap in my eyes.
However, the recent change in its customer strategy is quite drastic and has yet to prove itself. While dropping legacy clients might lead to higher margins, it also means the loss of a revenue source. Therefore I’m waiting for more insight into operational performance throughout 2021, and more importantly, 2022.
So for now, I’ll be keeping Yu on my watch list rather than in my portfolio.