Yü Group plc (LON:YU) was the topic of conversation when DirectorsTalk interviewed Gervais Williams, Co-Fund Manager of Diverse Income Trust plc (LON:DIVI).
DirectorsTalk asked: Yü Group has been a trust favourite for a number of years, and its latest update highlights strong organic growth, robust cash generation and continued dividend support. How do you assess the valuation at this stage and what gives you confidence that increased investment will enhance returns rather than dilute shareholder value?
Gervais noted: What is interesting about Yü Group is they have spent many years actually building a strong market position in terms of serving corporates, providing gas, electricity and such like, and they have now grown to real commercial scale. So, although its market cap is £280 million, it’s generating considerable sales, and we expect will take considerable market share over the next three and five years. So, when you look at it from that point of view, it’s got great prospects.
What is interesting is the valuation. The valuation appears to be abnormally low. They’ve just had a trading statement. The analysts forecast something like £96 million of cash in the balance sheet and no debt at the end of this year for a company which is only capitalised at £280 million. Going forward, we expect that to actually continue to increase, maybe £115 million at the end of the current year, maybe £136 million the year after and that’s if they hit forecasts, clearly if they exceed forecasts, there may be more upside.
So, if you look at it just in terms of the company, we think it has a very strong market position. We think it is going to be taking market share, but most particularly its valuation is overlooked. For that reason, in fact, if anything, we have been adding to the holding, it’s now one of our very largest holdings in the Diverse Income Trust because we think the risk–reward ratio is unusually attractive right now.
