UPGI - Universal Power Group

[eclecticvalue]

Hey guys here is a short writeup for UPG. Any thoughts and what am I missing?

 

Universal Power Group

Business: Universal power group(UPG)  is a distributor of batteries and power accessories and a supply chain management company specializing in third party logistics and value added services.

The value added services are as follows

• Battery Pack Assembly

• Battery Replacement Program

• Battery Recycling

• Kitting

• Product development

• Private Labeling

• Graphic Design

• Sales & Marketing Support

 

Why is it cheap?

The current balance sheet profile looks constricting to UPG in paying down the line of credit and operating lease for the upcoming year. Even though the working capital shows plenty of current assets compared to total liabilities, most of the Current Assets are in inventories and A/R. The inventories are usually not liquid and can’t be converted to cash very fast. It seems priced as if UPG will run into trouble in the future with the balance sheet. Also it is a very small microcap company many institutions will not take a look at this at all.

Ratios

P/E(TTM) 7.2

P/S(TTM) 0.1

EV/EBITDA(TTM) 5.0

P/Tang BV(MRQ) 0.5

Earnings Yield 19%

P/FCF 1.6

 

Perusing through the financials, the company makes money although the margins are low. EBIT margins in 2008, 2009, and 2010 have been 2.7%, 1.9%, and 4.8% respectively.

 

Ownership

The company is majority owned by Zunicom which has a 41% stake and there is a 49% ownership by the directors and Executive officers. It signals management incentive is aligned. Although looking at compensation expense it is 13% of market cap. Which I consider is a lot compared to most public companies. It is a family held company. William Tan used to be the CEO of the company but still owns majority of the company through Zunicom. He handed the reins over to his son in law Ian Edmonds.

 

Valuation

Figures in Millions           BV

Cash & Equivalents         $0.36

Accounts Receivable         $12.40

Inventories                 $20.30

Current Assets - Total $36.30

Total Liabilities                 $16.97

Shares Outstanding         5.02m

NCAV                       19.33M

NCAV Per Share         $3.85

Discount to NCAV           50%

 

Currently the stock is trading at a 50% discount below NCAV. It looks attractive. Unfortunately since it majority owned. There doesn’t seem to be an immediate catalyst in the future. Although the company still makes money from operations.

 

Risks

Technology Obsolesce

Writedown on A/R and Inventory

 

Overall it seems to be an earnings play, meaning if the stock can generate enough cash. UPG will most likely ward off a possibility of a bankruptcy as it is currently priced by the market.

 

[ValueHippie]

This is probably the best netnet in todays market. UPGI offers various kinds of batteries and supply chain services. They had to face some serious troubles in the past, like the loss of their main supplier. UPGI was hit hard by the financial crisis, when sales to its biggest customer (a security service company) declined substantially. Even though they reduced customer concentration over the years, Radio Shack became a pretty big customer. So I am interested, how the Radio Shack bankruptcy will impact earnings in the future. Since UPGI delisted in early 2014, it's hard to tell how the Radio Shack bankruptcy will affect UPGI.

UPGI has NCAV of 4.06$ and trades at ~2$. In 2014 UPGI increased EBIT by 276%, mainly due to cost savings. When UPGI was spun out of its parent company it was highly levered, with a debt equity ratio of over 100%. Since then UPGI produced significant FCF and used almost all of it to repay debt. I expect the company to be completely debt free in the next two years. Today the company also announced a cash dividend of 10c.

 

Have a nice day,

Steve