This UK small-cap stock is up 90% in 2021. What’s next?

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UK small-cap stock Luceco (LSE: LUCE) is up nearly 90% in 2021 so far. That’s pretty impressive. Over 12 months it has increased by a whopping 160%.

I first covered the company on 27 May and was bullish on the shares. Since then, the stock has risen by 40%. But the question I now ask myself is, what’s next for the share price?

Well, I’m still bullish on the stock and would still buy today. I reckon the shares could rise further. The firm released its six-month trading update last month and it was positive.

The numbers

As a quick reminder, Luceco is a manufacturer and distributor of wiring accessories, LED lighting and portable power products for a global customer base. It’s not the most exciting of businesses, but it has delivered a strong set of results.

Its trading performance has continued to improve during the period. Revenue increased by 51% to £108m compared to last year and was 31% higher versus 2019.

Sales have been driven by stronger and broader demand than expected. This was seen from the residential sector, where revenue was boosted by new business wins as well as continuing high levels of home improvement activity. Commercial and institutional demand is also improving.

Pressure

So far the UK small-cap company has managed to protect its profit margins from inflationary pressures on raw material and freight prices. Its gross margin over the six-month period came in at 38.5%, which was similar to 2020. But of course, there’s no guarantee this will be maintained.

In fact, the firm estimates that the “annualised cost impact has increased from £15m to £20m” from inflationary pressures. It expects these headwinds will increase in the second half of its financial year, but reckons its actions can broadly maintain the current margin level. If these costs do rise further, this is likely to impact Luceco’s profitability as well as the share price.

Outlook

What I find encouraging is that the board believes it can deliver performance that is ahead of current market expectations. It also expects to improve on 2020 and pre-pandemic levels. This suggests that it thinks the strong demand for its products can continue for the rest of its financial year.

The company has said that it can generate full-year revenue of at least £220m, which is 25% higher than last year and 28% more than 2019. It’s a similar story for profits as well. It reckons that its adjusted operating profit can be at least £39m, which is a 30% increase on 2020 and more than double 2019’s level.

Cash conversion is also expected to improve in the second-half of 2021. The extra inventory that was held up in the first six months to compensate for supply chain disruption is progressively being released.

Should I buy?

As I said, I reckon the UK small-cap stock could rise further from its current level. Especially if the strong demand continues and it can deliver its 2021 guidance.

Inflationary pressures are somewhat concerning. But as economies start to recover from the pandemic, raw material and freight prices should normalise. Hence, I’d buy.

The post This UK small-cap stock is up 90% in 2021. What’s next? appeared first on The Motley Fool UK.

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Nadia Yaqub has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.

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