Wynnstay (LSE:WYN) has shown average conventional earnings of 29.3p per share over twelve years. With the 19.9m shares it has in issue today if it earned 29.3p per share then that would be a total of £5.83m.
If I was to assume that this will be the earnings attributable to shareholders and, importantly, available to shareholders to remove from the company in each of the future years then I might value the equity at £72.1m:
£5.83m/0.08 = £72.9m
(The market capitalisation of WYN was 19.9m x £3.405 = £67.8m when I bought)
But conventional earnings does not usually adequately allow for the fact that with some companies earnings cannot be taken out of the company if it is to maintain its unit volume of output, spend enough to maintain its economic franchise (e.g. on working capital, new machinery, marketing, service quality, employee training, etc.) and invest in all value enhancing projects.
Some firms have to invest so heavily in these items that little of the conventional earnings can be taken out by shareholders.
Owner earnings is more useful than conventional earnings for getting at the amount shareholders can take after allowing for necessary investment to maintain the quality of the business.
"Owner earnings" in the past
£000s YEAR 2013 2014 2015 2016
Profit after interest and tax deduction 6,171 6,697 6,670 5,829
Add back non-cash items such as depreciation, goodwill and other amortisation 2,523 2,519 2,675 2,783
Totals to: Amount available for distribution to shareholders before considering the need to spend on fixed capital items to maintain the comp………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
Wynnstay (LSE:WYN) has stuck to the same areas of business for decades. This is its strategy, as set out in the 2004 AIM Admission Document:
“The Group intends to continue to develop its three trading divisions [Arable, Feeds, Stores (it had 24 stores then, 54 now)]. As part of its five year corporate plan, it intends to expand these three key areas both organically and by suitable acquisition. The Directors believe they have the depth of expertise within the Company to continue to expand the business as they have in the past.”
In 2003 turnover was £85m, compared with over £430m today. A number of feed, grain, retail and haulage acquisitions followed. There were some big moves such as the acquisition of Glasson Grain in Lancashire in 2006, Just for Pets in 2007, Wrekin Country Stores in 2007 and Young Animal Feeds in 2009. By 2009 turnover was £215m.
History shows a consistent strategy even to this day, as stated in the 2018 Annual Report:
“Over a period of the last thirty years, a twin stranded growth strategy has been successfully implemented…These two strands are represented by focused acquisitions, and gradual organic expansion through increasing geographical reach and product extension…The fragmented nature of the supply sector into farming and the rural economy has supported the success of this strategy, the Board believes that many opportunities remain, and that the continuation of this approach, with additional financial resource, will continue to produce rewarding results for all stakeholders in the business.”
Alongside the strategy the firm pursued a policy of increasing dividends – the 2004 Admission Document stated:
“The Company has a progressive dividend policy which seeks to reward shareholders. The Directors therefore intend to maintain a balance between retained profit and profit available for distribution to shareholders.”
In 2003 the dividend was 3.8p today it is 14.6p, an average annual growth rate of 8.8%.
Shareholders are not the sole priority
At first it seems shocking that directors do not state that the company is run solely to maximise shareholder wealth. They, in the 2020 Annual Report, state the aim is to achieve a balance “to satisfy the expectations of all stakeholders”. There are five main “stakeholder groupings”:
My last two newsletters discussed the steady profitability of Wynnstay (LSE:WYN) through good times and hard times. When I recently bought at £3.405 I judged there to be a good margin of safety between its intrinsic value and what Mr Market was asking for it. Since then Wynnstay has reported good profits for the year to October 2020 in the face of the Brexit uncertainty, Covid restrictions and the recession. Also Simon Thompson, a writer for Investors Chronicle, has written positive things about the company. So the share has risen to £4.40. You will have to make your own judgement on whether the margin of safety is now sufficient.
(I've recently been approached to run a deep value mutual fund (an OEIC, supervised by the FCA, and open to all investors). A thought occurred to me regarding the gap between me buying Wynnstay and publishing a series of Newsletters about the company and the £1 rise in share price during that time. If I had been running the fund I would have invested other people's money alongside mine at £3.405, or perhaps a little more given the larger sum to invest. Clearly, this is an argument for saying yes to becoming a fund manager. What do you guys think? Would anyone be interested in putting money into a fund where I had sole decision making power on investment selection? Investment management charges, by the way, would be 0.85% of assets under management.)
Wynnstay's Piotroski Analysis
If the firm is profitable and produces positive cash flow it has a capacity to generate funds internally. A positive earnings trend suggests an improvement in the firm’s ability to generate positive future cash flows.
2019: £6.1m/£175m = 3.5%
No Piotroski point scored.
4. Cash flow (before WC investment) greater than profit (so profits are not driven primarily by positive accruals, which may be ‘managed’)? WYN scores a point here.
Leverage, liquidity, and source of funds
Measuring changes in capital structure (debt:equity ratio) and the firm’s ability to meet future debt service obligations.
2019: £3.1m/£170m = 1.8
An improvement therefore another Piotroski point.
2.Has the firm’s current ratio (current assets divided by current liabilities) improved over the past year?
2020: £114m/£58m = 1.97
2019: £121m/£67m = 1.81
Respectable ratios in both years, and an improvement in 2020, therefore one more Piotroski point.
3. Has the firm avoided raising fresh equity capital (e.g. rights issue or placing) in the last year?
It has, so a point is gained here.
2019: £62m/£491m = 12.6%
An improvement, therefore an………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
I first bought Wynnstay Group shares (LSE:WYN – not Wynnstay Properties) a year ago at 317.4p. They have since reported robust results in the face of both Brexit and Covid. The impressive profits history and the strong strategic and financial position they enjoy in the post-Brexit world serving farmers and other rural folk means I have confidence that this business will continue to grow steadily. So, I’ve bought a lot more shares at 340.5p for my Modified price earnings ratio portfolio. (Market capitalisation of Wynnstay at my buying price: £3.405 x 19.95 shares = £67.9m)
Wynnstay was set up 100 years ago as a farmer’s cooperative to supply items such as feeds, fertilisers and seeds. It still has 3,000 farmer shareholders, but is now on AIM with many other shareholders
Its shares have dropped from over £6.60 since early 2017 on fear of Brexit decimating farming. In previous newsletters (see 22nd – 30th July 2019 and 10th – 16th January 2020) I expressed my reasons for thinking that UK politicians – and European politicians for that matter – would not let UK agriculture suffer in the brave new world they were creating and thus the share price decline was overdone, especially in light of the fact that Wynnstay gains more profit from retailing to the general public (as well as farmers) from its 54 country supply stores than it does from delivering bulk items to the farm gate.
A new dawn
Fortunately, there is renewed hope in the land, and Wynnstay’s directors are optimistic that farm investment will recommence. According to Wynnstay’s directors UK food producers now have the ability to seek new markets for agricultural products and the UK Agriculture Bill will result in a more resilient agricultural sector.
It expects to benefit from its role in supporting farmers focusing on environmental investment and efficiencies (it has a lot of experts advising farmers as well as selling them bulk items): “We therefore view medium and long-term prospects for our industry positively…We see a significant role for Wynnstay in supporting farmers with products and services to help drive sustainability and greater efficiency as well as to reduce carbon emissions, including the management of farm waste.” (2020 Annual Report)
Already things are improving: “The new financial year [starting 1st November] has started well. Stronger farmgate prices towards the end of 2020, along with the EU settlement and UK Agricultural Bill, have helped to buoy sentiment across the farming sector. Wynnstay’s performance to date is in line with management expectations, and we believe that our strong financial position and balanced business model puts us in an excellent position to make good progress over the coming year and beyond. We look to the future with confidence.” (2020 Annual Report)
Analyst’s expectations (only one analyst): EPS: 2021: 33.8p, 2022: 34.18p
Dividends: 2021: 15.15p, 2022: 15.8p
We have here a well-managed company with a sound business strategy, loyal customers, diversified product line/customer groups, strong finances and a history of good earnings relative to the current share price.
Oh, and a nice 4% dividend yield – and the directors are in the habit of lifting the dividend every year (for 17 years in a row).
Short note on changes in farm subsidies
While the UK government has “guaranteed” the current annual budget to farmers in every year of the current parliament, the basis on which the m……………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
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