Bargain shares: record results and bumper upgrades

Record first half performance from specialist agricultural products supplier Wynnstay Group (WYN:490p) were underpinned by three factors: strong recovery in farmer confidence, driven by higher farmgate prices – two-thirds of the £20m revenue rise reflected commodity price inflation; clarity provided by the EU settlement and the landmark Agriculture Act; and the benefits of having a broad spread of activities, supplying both livestock and arable farmers.” Wynnstay’s chief executive Gareth Davies has every reason to “view the future with confidence.”

Not only has the board been increasing exposure to activities where demand is more stable year-on-year, but farmer sentiment in the sector has improved no-end post-Brexit. Furthermore, although Wynnstay’s agriculture division delivered 21 per cent higher pre-tax profit of £2.2m on revenue of £180m, as expected last year’s exceptionally poor planting season and poor harvest impacted grain trading and seed sales across the UK. However, the 2021 harvest is expected to revert to more normal yield and tonnage. The board have also recently appointed a commercial sales and marketing director, so completing the new management structure put in place at the end of the last financial year, following a major reorganisation of reporting lines and roles.

Wynnstay has a rock-solid balance sheet – net asset value of £101m (504p a share) is heavily backed by stocks, property, cash and trade receivables – and is highly cash generative, both factors supported two small strategic bolt-on acquisitions to extend the reach of the business in eastern England. More acquisitions are on the cards as closing net cash on a pre-IFRS16 basis (excludes lease liabilities) more than trebled to £4m year-on-year despite the commodity inflation in a period of peak working capital requirements. On the same basis, house broker Shore Capital expects net cash of £13.7m (68p a share) at the financial year-end (31 October 2021).

Given the positive trading outlook, the brokerage has raised both 2021 and 2022 pre-tax profit estimates by around 15 per cent to £9.6m and £10m, respectively, to produce earnings per share (EPS) of 39.2p and 40.8p. This means that the shares trade on a forward cash-adjusted price/earnings (PE) ratio of 10.5, a modest rating for a business that is benefiting from improving sector sentiment, proactive initiatives by the restructured management team, and is recycling surplus cash into earnings accretive acquisitions. The board also lifted the first half pay-out by almost 9 per cent to 5p a share (ex-dividend: 30 September) and analysts expect an annual dividend of 15.4p a share, rising to 16.2p in 2022, implying prospective dividend yields of 3 per cent and 3.2 per cent.

The holding has produced a 15.6 per cent total return since I suggested buying the shares in my 2021 Bargain Shares Portfolio, and I feel that the earnings upgrade cycle has some way to run, so much so that I am targeting a return to the 2014 and 2017 all-time share price highs (685p). Buy.

Source: London Stock Exchange at 1.38pm on 30 June 2021.

■ Simon Thompson's latest book Successful Stock Picking Strategies and his previous book Stock Picking for Profit can be purchased online at www.ypdbooks.com, or by telephoning YPDBooks on 01904 431 213 to place an order. The books are being sold through no other source and are priced at £16.95 each plus postage and packaging of £3.25 [UK].

Promotion: Subject to stock availability, both books can be purchased for the promotional price of £25 with free postage and packaging.

They include case studies of Simon Thompson’s market beating Bargain Share Portfolio companies outlining the investment characteristics that made them successful investments. Simon also highlights many other investment approaches and stock screens he uses to identify small-cap companies with investment potential. Details of the content can be viewed on www.ypdbooks.com.