Wynnstay Issues Surprise Profit Warning Amidst Brexit Woes: Shares Fall 20%

By | 21st March 2019

Agricultural products supplier Wynnstay Group (LON:WYN) today put out a profit warning citing bad weather and Brexit among other things as market conditions bite. The share price fell over 20%, putting it at new five-year lows:

This was surprising for a few reasons: the business had been very stable, with few shocks. After all, a product like animal feed would have quite a constant demand, and with low margins the segment was unattractive for competitors. This had made for a rather sideways share price, and existing holders were picking up a progressive dividend: not so bad.

The share also was highly regarded at Stockopedia, with a rating of 93. That, of course, seems set to change.

Wynnstay make a bit more than just animal feed: manufacturing other products for farming such as fertiliser and via its online stores a range of accessories.

The Warning

The profit warning was notable today for not containing any numbers at all: some of these may have been helpful. It begins:

Following last year’s record results and after an encouraging start to the new financial year, market conditions in the second quarter have significantly weakened and trading is now behind seasonal norms.

The reasons why are as follows:

This mainly reflects the abnormally warm winter months, which reduced the requirement for feed and other weather-related products. It also contrasts significantly with last year, when the winter season was unusually long and harsh.

Weather is being used increasingly it seems as some kind of factor. Good old Brexit gets a mention:

The recent weakening in farmgate prices, partly believed to be the result of Brexit/political uncertainties is also undermining farmer confidence.

This is about as close as we get to for some numbers:

The impact has been felt across both the Group’s Divisions. Results for the first six months of the financial year are therefore expected to be substantially behind those of last year. Given these prevailing uncertainties, management currently believes it prudent to anticipate that the full year outturn is likely to be substantially below current market expectations.

There are no research notes on Research Tree but it appears that some market expectations would be turnover of £477m and net profits of £7.75m, so ‘substantial’ could mean a lot of things.

The Business

Wynnstay is a smaller company with a long history: only last year it celebrated its 100th year. It serves the needs of farmers by manufacturing a range of feeds, fertilisers and other related products via a range of channels. It previously had a range of physical shops under a company called Just for Pets, but this loss-making division has now been disposed of.

In a way, the business has not garnered much attention from the investing public. Agricultural supplies are never going to be fashionable, and it could be said that the market is saturated anyway. Margins are declining and there are additional pressures for farmland to be used for something else. This shows up in rather mediocre performance of the business: margins are narrow and growth is hard to come by.

That being said, that could be a little ungenerous as save for a blip in 2017 at least results have been positive:

That is a relatively stable set of figures, and points to some conservative management. We have seen in other cases such as CVS Group where chasing growth by expanding into other countries has led to problems. With other countries agriculture more than likely already having mature supply chains, it would be a gamble for Wynnstay to take that on, and they haven’t.

Delving into the balance sheet, the same theme continues, with a net asset value of c.£90m and only intangibles of £15m. Unsurprisingly, the share now trades at a rather big discount to book value. One strange aspect is the sharp increase in inventories:

Perhaps stockpiling for Brexit may explain this, although this could be a source of trouble ahead if the value of these inventories needs to be written down, as we’ve seen in other sectors. Having said that I would think this is less likely for Wynnstay, as animal feed is less likely to go out of fashion and has very long shelf life.

The cash position is similar. There is a small amount of borrowings, although the net position has swung from a positive one to a negative one. Cashflow was adverse this year because of the increased working capital requirement. Relative to the size of the group however, this seems immaterial. Overall here there seems to be little to worry about.

Comment

As always the question should be, is the profit warning down to fundamental or temporal factors? It seems that this is one of the clearest cases of something being temporary. Weather cuts both ways for Wynnstay: a spell of bad weather increases demand for their products, and in future we will always have extremes of hot and cold.

The Brexit case is also well documented. Arguably farmers are more affected by the details here, as many will be doing regular business with the European Union. It is therefore not unreasonable to think that the uncertainty will be affecting them.

One question will be the valuation of the company. Today’s price has put it back to £65m – that is less than 9 times of previous earnings (although we know that this years earnings will be less than that). Even assuming this year is a one-off, does it deserve such a high rating in any case? In my view there are several superior businesses which could be bought on a price/earnings ratio of 10 or below.

One consolation may be the dividend. There is no word on that as yet, but with a progressive policy paying a predicted 13.9p this is a decent return at the share price, as it should be the case that subject to working capital not eating up cash again, the payout should be well covered, and given the nature of the business, is a good bet to continue into the future.

Given the theoretical asset backing I think this is low-risk, but then again I also think it is low-reward, as I don’t see many catalysts for the share price to appreciate massively. 3/5.

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