For gardeners the length and breadth of the UK, 2012 has been one of the worst years in memory. It has been biblically wet and, when it hasn't been raining, plants have been under siege from a plague of slugs. Green-fingered enthusiasts have hardly ventured further than the potting shed and this has translated into an awful year for one of the UK's largest suppliers of compost and horticulture products, William Sinclair (SNCL). We think that, after a flurry of profit warnings and City analysts slashing their earnings forecasts, it's still right to sell shares as the company heads for a second-half loss and a savage cut in the final dividend.
- Demand rising for new product
- Compensation claim
- Second-half loss likely
- Borrowings rising
- Dividend cut on the horizon
- Chief executive leaving
'It never rains, but it pours' couldn't be more apt for William Sinclair. The company is acutely sensitive to the weather - if it gets too wet it can't cut peat from the bogs that provide the raw material for its compost. The company warned in August that it could not harvest any peat in July. In October it added that widespread flooding in northern England had also hit the end of the peat-cutting season. And the sodden clods they got out of the ground had to go through drying machines, adding to costs.
Scandinavia and the Baltic countries only achieved 30 to 50 per cent of the normal peat harvest. So the shortfall from mainland Europe pushed up prices just as William Sinclair had to buy in product to meet demand. As a result, analysts now forecast a second-half loss. Broker WH Ireland has cut its estimate for full-year pre-tax profits from £3.3m to just £200,000 (see table). It forecasts a recovery to £2m pre-tax for the year just started, but, even if it is achieved, that still leaves the shares trading on a punchy 17 times earnings.
WILLIAM SINCLAIR (SNCL) | ||||
|---|---|---|---|---|
| ORD PRICE: | 147p | MARKET VALUE: | £25m | |
| TOUCH: | 147-152p | 12M HIGH: | 196p | LOW: 135p |
| DIVIDEND YIELD: | 3.1% | PE RATIO: | 17 | |
| NET ASSET VALUE: | 91p | NET DEBT: | 60% | |
| Year to 30 Sept | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2009 | 46.3 | 1.24 | 6.8 | 3.5 |
| 2010 | 48.5 | 2.06 | 9.8 | 5.0 |
| 2011 | 54.3 | 3.18 | 13.9 | 6.2 |
| 2012* | 50.0 | 0.20 | 0.6 | 4.5 |
| 2013* | 57.0 | 2.00 | 8.6 | 4.6 |
| % change | +14 | +900 | +1333 | +2 |
NMS: 700 Market makers: 6 Beta: 0.5 *WH Ireland estimates | ||||
When William Sinclair provides full-year results in early January another prop for the share price will be kicked away - the final dividend will be slashed, with analysts estimating a cut from 4.4p last year to 2.6p. The dividend cut is no surprise as William Sinclair has been forced to bridge its cash shortfall from the dismal weather with overdraft finance. At the half-year stage it carried net debt of £9.5m, but analysts expect this to be higher by the year-end. The £17m borrowing facility with Lloyds is up for review at the end of December.
William Sinclair pins its hopes for recovery on producing a peat alternative from garden waste called SuperFyba and it has doubled capacity at a new site at Ellesmere Port. But it looks as though it will be a long road back for William Sinclair, even more so because long-serving chief executive Bernard Burns leaves in early 2013.
