A second profit upgrade in three months by WYG (WYG:AIM) sends the infrastructure and environment consultant up 3% to 104p. Analyst price targets and earnings forecasts are subsequently revised upwards. All these pieces of good news support our running Plays of the Week trade which is now showing a 38.7% gain to date.

We said to buy the stock at 75p in May as a recovery play following its return to profit at the operating level last year (see interims, 29 November 2012). We thought full-year results in June would fuel the recovery story and that proved correct.

WYG - Comparison Line Chart (Rebased to first)

Today's trading update shows a return to revenue growth, thereby adding another positive element to the investment case. New business has been secured in the UK including work for the Ministry of Defence. There's also contract wins driven by a pick-up in activity in the construction and housebuilding sectors. Overseas, WYG is winning work in such places as Southern Africa, Bulgaria, Uzbekistan and Croatia.

One of the challenges for investors is to decide whether the recovery story is already priced into the stock. Working off upgraded forecasts (there's still quite a difference between the different analyst numbers), we calculate via the market consensus that the shares trade on 23.1 times March 2014 year-end estimates, dropping to a price to earnings (PE) ratio of 17.3 for March 2015.

That's arguably high for a support services stock but we are happy to stick with our 'buy' case as there's clearly momentum in the business which will drive the share price for the near-term, potentially overriding the fundamental valuation case on a temporary basis. While that leaves WYG vulnerable to a sharp correction upon the slightest bit of bad news, that's a risk investors must take if they remain long on the stock.

Another risk to consider is that two profit upgrades in a short period means the share price may now be dependent on further upgrades to keep rising.

WH Ireland upgrades its price target from 125p to 135p. It comments: 'As a business which has experienced a strong turnaround, WYG is not a lowly rated stock; however with significantly increasing momentum, it is one with significant upside potential, particularly given that forecasts are based on conservative assumption about margins. £15 million to £20 million full-year forecast cash on the balance sheet is supportive.'

We examined the margin case in our June article, saying that forecasts at the time were based on WYG achieving 1.4% profit margin at the March 2013 year-end and 3% margins in the current financial year.

We added: 'WYG’s sector average margin is 6% to 7%, which illustrates how the business has struggled over the previous years and how it must still do better to catch up with its peers. Yet the group says many of its current projects represent business with profit margins of 6% to 8%. It aspires to be at between 8% and 9% margin in the next three years. This is why we see significant upside for the share price, assuming WYG can achieve this desired margin uplift. At this stage, it should start to throw off decent levels of cash. This could help to fund acquisition of niche businesses generating 10% or more margins, thus further improving the quality of its earnings.'

Dividends aren't forecast to commence until the March 2016 year-end. This is because it must first settle property obligations and professional indemnity claims.

N+1 Singer raises its 12-month price target to 120p and says 150p is a 'realistic medium-term target'. Numis has a 115p price target and switches from 'buy' to 'add', albeit noting it would see further upside 'if growth indications continue to improve'.

Issue Date: 03 Sep 2013