Join our community of smart investors

Wincanton ready to deliver the goods

After a bloody recession, Wincanton is fit enough to warrant a substantial re-rating as the economy and profits begin to recover
January 2, 2014

Wincanton's (WIN) shares plunged over 90 per cent during the recession. Falling imports from the Far East hit the distributor’s container business and high-profile retail customers went bust. But new chief executive Eric Born quickly made his mark, hiving off underperforming and loss-making operations. Now Wincanton's debt is falling and the UK economy may recover faster than once seemed likely. So City analysts reckon that, from a low base, Wincanton can generate double-digit earnings growth for some years to come. Yet that's yet to be reflected in its share price.

IC TIP: Buy at 132p
Tip style
Value
Risk rating
Medium
Timescale
Long Term
Bull points
  • Highly geared to economic recovery
  • Restructuring programme ongoing
  • Low rating on several metrics
  • Chairman buying the shares
Bear points
  • No improvement in core business yet
  • Still lots of debt

A lot has changed since Mr Born joined Wincanton three years ago. Then, it was drowning in a sea of debt amassed via an ill-timed expansion into Europe a decade earlier. Parts of that business were losing money, too, and little had been done to trim excess costs. But the mainland Europe operation has now been sold and the loss-making foodservice operation closed. Making debt reduction a priority meant cutting the dividend was a necessary evil to improve the health of the balance sheet. Profit margins have grown steadily, too.

First-half results for 2013-14 supplied evidence of further progress. Wincanton slashed net debt by £20.4m between March and September to £87.2m, and its average level of net debt by £26m to £175m. That's encouraging, and interest payments fell £1.3m as a result. Analysts forecast that pension payments and capital spending will put year-end net debt at about £105m, then it should fall steadily over the next few years accelerating more rapidly once onerous leases begin to expire in 15 months' time.

You may also like to consider…

Breedon Aggregates at 40p

■ Value backed by quarry assets

■ Values set to pick up as construction cycle turns up

St Ives at 174p

■ Business being refocused on higher-margin marketing consultancy work

■ Rating yet to catch up with business transformation strategy

Of course, any incremental growth in the UK economy will quickly feed through to Wincanton’s profits. And the prospects are improving. According to the Office for Budget Responsibility, the UK economy is expected to grow 2.4 per cent in 2014. Even using the IMF's more modest estimates of 1.9 per cent implies the UK will grow almost twice as fast as the euro area. Apart from the obvious benefit to revenue, those onerous leases could also become less troublesome as sites are filled, and any macro improvement should revive the container transport operation, too.

True, management admits there has, so far, been no tangible improvement in Wincanton's core retail and consumer-goods business. But that could change. Surveys suggest UK households are increasingly positive about their finances, and most should see a real increase in wages this year. Britain’s housing boom is already benefiting Wincanton’s construction business, where there’s plenty of momentum.

Crucially, there has been a steady stream of new contracts. Building materials big-hitters Lafarge and Cemex are in the bag, and long-standing contracts with oil major Valero, formerly Chevron, and drinks giant Pernod Ricard have been renewed. Wincanton has lucrative deals with all the big supermarkets plus Marks & Spencer (MKS), GlaxoSmithKline (GSK), Premier Foods (PFD), Rolls-Royce (RR.) and the NHS, too. Of course, competition is fierce, yet a tight grip on costs should offset any pressure on margins on renewed deals.

WINCANTON (WIN)

ORD PRICE:132pMARKET VALUE:£161m
TOUCH:129-132p12-MONTH HIGH:139pLOW: 44p
FORWARD DIVIDEND YIELD:nilFORWARD PE RATIO:8
NET ASSET VALUE:negativeNET DEBT:£87.2m

Year to 31 MarTurnover (£bn)Pre-tax profit (£m)*Earnings per share (p)*Dividend per share (p)
20111.3330.019.614.9
20121.2028.818.24.83
20131.0921.312.8nil
2014*1.0823.214.1nil
2015*1.1125.515.6nil
% change+2+10+11-

Normal market size: 5,000

Matched bargain trading

Beta: 0.6

*Investec Securities forecasts (all profit & earnings per share figures, underlying)

Wincanton is also tackling the deficit in its pension schemes - £142m in September. It has shut its final-salary pension scheme, to which about 7.5 per cent of its workforce belong. That will help to crystalise its liability and cut the chance of an increase in deficit payments - currently £14m - after the triennial review in March. Meanwhile any increase in long-term interest rates will - at a stroke of an actuary's pen - reduce the funds' deficit.

And new accounting rules, which include amortising any pension-fund deficit within earnings, make valuing Wincanton using traditional metrics more straightforward. Even though that change reduced EPS estimates by up to 30 per cent, Wincanton's shares trade on just 8.2 times forecast earnings for 2014-15 (see table). That's much less than the rating at which shares in rivals Exel and Tibbet & Britten traded before their acquisition by DHL, and below Wincanton’s own historical median of about 13 times.

Of course, Wincanton could always use a rights issue to solve its debt problem. If the company cut its net debt to equal forecast cash profits of £64m then broker RBC Capital Markets reckons the shares would be worth 175p before any diluting effect of the rights And if the shares regained that median rating of 13 times, the price would top £2. In a vote of confidence, chairman Steve Marshall has just bought £25,000-worth at 125p each.