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. 

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.

Perhaps more remarkably, Yu Group shares are up more than 200% over the past 12 months. That has mostly come since 25 January, since when we’ve seen a 180% gain. So what happened to cause all that? Well, 26 January brought a trading update headlined “Strong trading and performance ahead of expectations“.

The company, which bills itself as an “independent supplier of gas, electricity and water to the UK corporate sector“, gave us an appraisal of its 2020 year. Chief executive Bobby Kalar spoke of “an extremely strong trading performance, accelerating throughout H2 2020“. He added that the company is beating market expectations for revenue, cash and profit. When that happens, market bullishness often follows. And looking at the Yu Group share price, that has certainly happened here.

Beating market expectations

But I need to see some figures before I consider buying Yu Group shares. Yu now expects revenue of more than £100m. Adjusted EBITDA is said to be “significantly ahead of market expectations“, though there’s no figure on it just yet.

In the early days of growth companies, I rate cash flow and liquidity as key things I watch out for. And the cash situation is looking good to me. The company reports a cash position of £11.7m, up a hefty £9.3m from 2019’s year-end figure of £2.4m. And we’re apparently looking at a bill-to-cash ratio of 99%. It sounds like Yu’s corporate customers are good payers.

There’s another thing I like, looking at this update. The firm says it has good forward visibility of revenue, which should take some of the uncertainty out of things. But after the recent skyrocketing, is the Yu Group share price an attractive buy now?

Yu Group share price valuation

But what are the risks? Well, it’s difficult to put any valuation on Yu Group shares at the moment. For one thing, Yu recorded losses in the past two years, so some of those trailing financial ratios don’t mean much at all.

Looking back, Yu reported net cash of £17.9m at 30 June 2020, higher than the year-end figure. And though there was just £2.4m cash at the end of 2019, six months previously the books had boasted a sum of £17.4m. So I’m definitely not taking that impressive 2020 year-on-year change in isolation. I want to get a proper feel for the trend.

Does it make sense to look for ongoing trends at all? In its latest release, Yu speaks of “successfully repositioning the group.” Does that mean I need to abandon previous accounts and see where the new version of the company is starting from?

I really am just taking my first look at this company, spurred by the soaring Yu Group share price. It’s boosted the market cap above £50m now, which is where I start to get interested. So I’m just exploring some of the things I usually look for, and working out which questions I’ll need to ask. Until then, I see the uncertainties and volatility around the firm as a risk. Full-year results should be with us in late March so I’ll be checking back.

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.

The company’s stock price has leapt an unbelievable 395% in value since this time last year, turning it into a respectably sized £170m market cap firm. And stock pickers’ enthusiasm isn’t without a basis in reality as Yu’s full year results released this morning showed revenue rising from £16.2m to £46.9m year-on-year with adjusted operating profits racing ahead from £0.2m to £3.1m.

And far from being a one-off, Yu is well-positioned to deliver similar levels of growth in the years ahead. Management disclosed that contracted revenue for fiscal year 2018 had already topped £50m and that “revenues for FY 2018 are expected to be ahead of current market forecasts with revenues for FY 2019 significantly ahead of current market expectations.”

Although the group is delivering start-up levels of growth, it’s also in a very good financial position. Net cash balances at year-end were £4.8m, of which £3.5m was set aside for hedging contracts, while operating cash flows turned from a negative £0.8m to a positive £0.5m last year. The rising benefits of scale also meant adjusted earnings per share of 17p came in well ahead of the sole analyst’s forecasts of 13.9p.

Unfortunately, the stock is now much pricier than when I last looked at it with a valuation of 72 times trailing earnings. While I believe Yu’s high levels of revenue visibility, founder-led management team and proven ability to win over customers with its very high levels of customer service give it further room to run, this valuation is simply too expensive for my taste.

Of course, that doesn’t mean in a year’s time I won’t look back and kick myself for not investing in its shares.

A captive market eqauls bumper profits

Travel food concession operator SSP Group (LSE: SSPG) has returned a more sedate 50% over the past year, but this may be even more impressive given the group has been around for years and it’s a giant with a market cap of nearly £3bn.

Part of the company’s success is down to healthy global economic growth that has led more people to travel, but the main driver has been operational improvements. For example, seemingly simple changes such as improved staff scheduling and opening outlets based on successful local restaurants have trimmed millions of pounds in annual costs and brought more customers in the door.

The success of these tweaks was clear in the company’s results for the year to September, when revenue rose 11.7% in constant currency terms to £2,379m due to like-for-like growth of 3.1% and further contract wins, especially in the massive US market it is just now breaking into. And a laser-like focus on costs led to operating profits rising a full 27% to £162m even as management invested heavily in readying stores from new contract wins.

While SSP can’t offer Yu Group levels of growth, it’s still growing profits rapidly and has plenty of room to expand, which together with a more sedate valuation of 27 times forward earnings looks much more palatable to me.

Yet since I looked at the investment case in November, the stock has plummeted over 35%. I warned investors that it was time to be careful, due to the exponential 18-month price rise and the fact that several institutions were shorting the stock. That call looks good in retrospect – those who bought late last year will now be sitting on significant losses.

With the stock back at 115p, and up 10% today, is now the time to get on board?

Reasonable valuation

For FY2018, IQE is expected to generate revenue growth of around 18%. Earnings of 4.24p per share are forecast, roughly 30% higher than the expected figure for FY2017. That suggests the company’s growth prospects are significant. Given that level of growth, the forward-looking P/E of 27.1 doesn’t look outrageous, to my mind.

Having said that, I won’t be buying the stock right now for one reason: the short interest.

Beware the shorters

In recent weeks, IQE has surged up the dreaded short interest tracker table, to now occupy fourth spot. That means many super-smart hedge fund managers are betting on its price to keep falling. Currently, 11.8% of its shares are being shorted. When a stock is that heavily shorted, you need to be careful. Just looked at what happened to heavily-shorted Carillion shares recently. I’ll be steering clear of IQE for now.

Explosive growth

Given the short interest, growth hunters may be better off looking at £144m market cap Yu Group (LSE: YU). The company provides gas and electricity to small and medium-sized businesses throughout the UK, and has enjoyed a share price rise of 240% over the last year. Are there more gains to come?

A trading update released this morning was very positive, revealing that revenues for 2018 and 2019 are set to be “substantially ahead” of previous expectations. The company announced that operating profits will be ahead of market expectations too, despite increased investments in headcount and fixed costs. Chief Executive Bobby Kalar commented: “The business is developing well and our focus on our long-term sales growth is paying dividends. I look forward to the future with confidence.”

Looking ahead, analysts currently forecast revenue growth of around 50% for 2018, with the top line expected to hit £60.2m. Earnings are also expected to rise significantly. There appears to be strong growth potential here.

However, investors should bear in mind that the stock doesn’t trade cheaply. The forward P/E is currently a high 46, which doesn’t leave much room for error. Having said that, a PEG ratio of around one suggests that the company’s growth rate justifies the lofty valuation.

In the half year to June alone, the company’s sales rose 8% year-on-year (y/y) in constant currency terms and 17% at actual exchange rates, to £45.9m. This growth was led by the company’s in-house designs, which grew by 15% y/y in constant currency terms, to £27.3m. This rapid increase in sales illustrates just how attractive AMS’ quality and value proposition is to customers and there’s good reason to believe this level of growth can be sustained for quite some time.

The key is the group’s rapid expansion into the US, which is the world’s largest medical market by value by some degree. Constant currency sales Stateside in H1 rose 32% to £9.1m as the company’s market share rose from 19% to 24%.

And unlike many AIM listed medical companies, AMS is both growing quickly and is already highly profitable. In H1, pre-tax profits rose 27% to £11.4m and operations generated £9.1m of cash flow. This increased the company’s cash reserves to £55.2m and supported a 17% hike in interim dividend payouts to 0.35p.

Now, AMS’ shares are highly priced at 33 times forward earnings but with large addressable markets, enviable margins and cash flow, plus a very healthy balance sheet, I still reckon the company and its stock have very attractive growth potential.

Everyone needs energy 

Another fast rising growth share I’ve got my eye on is independent energy supplier Yu Group (LSE: YU), whose shares are up in value over 14% this morning following H1 results. The group supplies electricity and gas to commercial customers and differentiates itself from competitors by having high levels of customer service, including individual account managers and entirely UK-based call centre agents.

So far, corporate customers have responded very well to this proposition, which was clear in the half year to June as revenue rocketed from £5m to £20.7m y/y. This rapid level of growth came from the company landing larger corporate customers as well using third party brokers in addition to its in-house sales staff.

The cost of third party brokers did dent profitability in the period with gross margins falling from 21% to 17.7% y/y. However, the company is still in very good shape and finally cash flow positive, with operations kicking off £1m in cash during the period. This kept the group’s cash balance level at £5.9m, which is critical as it needs cash on hand to serve as collateral when hedging its energy purchases.

Looking ahead, growth over the next few quarters looks to be very good. Given H1 revenue and booked revenue for H2, management expects at least £39m in revenue for 2017 as a whole and has already contracted £23.2m for 2018. Much of this growth is already baked into the company’s valuation of 18 times 2018 forecast earnings, but I still see plenty to like about this founder-led business over the long term.