NWF shares slide as warehouse investment drags on profits

This year was always going to be something of a comedown for NWF (NWF), the fuel, food and animal feed distributor.

The company still generates around three-quarters of its revenue through fuel sales and a normalisation of prices in the period translated into a 74 per cent decline in operating margin for this division, down to just £700,000. A warmer period of weather also hit demand for heating oil. The animal feeds business also suffered as milk prices slumped and the milder weather meant better grazing conditions, which limited demand.

The food business flourished, though. Operating profit grew by 38 per cent to £2.9mn, or 73 per cent of the group’s total. Chief executive-designate Chris Belsham argued that NWF operates in a useful niche, consolidating products from smaller suppliers that are then fed into retailers’ networks. This is a service that smaller competitors can’t match for scale, and one in which larger distributors “are not specialists”.

NWF recently signed a 15-year lease for a 332,000 sq ft warehouse, which will grow the division’s capacity by 39 per cent. This is a big investment. The company had £13.3mn of cash (excluding leases) at the end of November, and it is spending £8.5mn on the warehouse's fit-out. Once complete, it is expected to generate an extra £2.8mn of annual operating profit, but this won’t be until 2026, and this year it will drag down headline pre-tax profit by £1.7mn.

Although guidance was maintained, NWF's shares slid by 8 per cent and trade at 11 times broker Shore Capital’s forecast earnings, just below their five-year average. Given the additional execution risk, we don't see a pressing case to invest. Hold.

Last IC view: Hold, 231p, 31 Jan 2023