Win with cheap Wincanton

The business of managing supply chains is cyclical and demand should pick up for Wincanton's services as the UK economy strengthens. While rising GDP is yet to feed through to improved demand from the majority of Wincanton's customers, construction companies - which account for 15 per cent of logistics revenue - are benefiting from Britain's housing boom. Meanwhile, rising disposable incomes makes it increasingly likely that demand will soon pick up from the group's core retail clients, which account for just over half of logistics revenues. Encouragingly, the group has announced a recent spate of contract wins - three major long-term deals have been renewed with Heinz, BAE Systems (BA.) and Lavendon (LVD) since the turn of the year.

Wincanton's prospects don't only hinge on cyclical growth trends, though. The growing complexity of supply chains in an era of multichannel retailing - whereby shoppers can place orders by phone and the internet as well as in store - means retailers are increasingly likely to turn to logistics experts, such as Wincanton.

In the unlikely event that the outlook for its customers turns sour, Wincanton's operation look relatively well protected. According to broker Liberum, no single client accounts for more than 10 per cent of revenue and most of the group's core transport and warehouse management contracts are based on low-risk open-booked contracts. Such contracts cover the bulk of Wincanton's operating costs and ensures a regular revenue stream, but also explain why group margins are fairly low at 4.5 per cent.

However, margins should steadily improve as pricing pressures from the recession dwindle, costs are cut further and efficiency improves. That's certainly the focus of chief financial officer Adrian Colman, who is set to replace Eric Born as chief executive in August. Moreover, Wincanton has recently been profiting from cross-selling higher-margin specialist services, such as shipping-container transport, vehicle maintenance and document management, to existing clients, including Asda and Argos.

Wincanton's stretched balance sheet is a major consideration. But as trading improves, a gearing effect should benefit shareholders. Financing costs eat up a high-but-relatively-fixed amount of profits, so any further profit growth should flow straight to shareholders - which exaggerates the impact of trading improvements on the bottom line. What's more, interest charges should fall as the group continues to hammer down debt. In the first half average net debt fell by £34m to £141m while period-end net debt was 23 per cent lower at £67m. And cash flows should improve next year as a £12m to £15m charge relating to onerous leases drops sharply.

Recent bond price falls (causing yields to rise) also provide grounds to hope sentiment will improve towards the massive £144m pension deficit, as bond yields are a key factor in determining the deficit's estimated size. Wincanton is paying £14m a year into the pension scheme until 2023.