Why it's time to take profits on Wynnstay

Specialist agricultural products supplier Wynnstay (WYN:455p) cut full-year profit guidance by 12 per cent after a sharp drop in fertiliser prices reduced first-half profit by £1.5mn.

Wynnstay carries substantial physical volumes of fertiliser raw materials for blending, so benefited from the sharp spike in prices last year, which led to multiple earnings upgrades. The production of nitrogen, one of the ingredients in fertiliser, uses natural gas, so surging European gas prices drove significant gains in the value of stock held by Wynnstay. However, the subsequent plunge in gas prices is being reflected in fertiliser prices, which have fallen back to pre-pandemic levels and this has negatively impacted the margin earned on stock held. The flipside is that lower prices should support higher sales volumes given that last year’s record fertiliser prices led to 25 per cent lower demand from livestock farmers, says chief executive Gareth Davies.

In the first half, commodity price inflation accounted for £48mn of the £73mn increase in group revenue, with the balance of revenue growth mainly coming from last year’s acquisitions: Hampshire-based poultry feed business Humphrey Feed & Pullets, and Tamar Milling, a manufacturer and supplier of blended feed products.

Unfortunately, the outbreak of avian flu proved another headwind, dampening demand from the free-range sector and subduing volumes of bagged feed. The silver lining is that the earn-out on the Humphrey acquisition has been reduced by £0.7mn to £2.7mn.

There were other positives, too. For instance, the group’s grain marketing business traded record volumes, a reflection of strong farm output prices, market share gains, geographic expansion and recruiting quality traders. Also, last autumn’s seed-planting season went well, with good volumes of winter cereals planted. The favourable growing conditions since then bode well for the forthcoming 2023 harvest and prospects of healthy grain trading volumes. Moreover, the spring-sown cereal crop acreage has increased above last year's level (and the national average), reflecting farmer confidence in grain prices.

That said, the shortfall in fertiliser activities, coupled with the 7 per cent like-for-like decline in first-half feed volumes – the dairy sector is seeing lower feed demand from farmers due to unrealistic milk prices in relation to their production costs, for instance – mean that the directors don’t expect to make good the first-half profit shortfall.

Earnings downgrade

Following the earnings downgrade, Shore Capital forecasts full-year pre-tax profit of £10.7mn based on 2 per cent higher revenue of £729mn. On this basis, expect earnings per share (EPS) of 36.6p, or less than half last year’s record result, implying the shares are rated on a forward price/earnings (PE) ratio of 12.4. They offer a solid 4 per cent prospective dividend yield, underpinned by a 5.3 per cent free cash flow yield.

I selected the Aim-traded shares, at 424p, for my 2021 Bargain Shares Portfolio, and advised top-slicing two-thirds of your holding, at 635p, to recover the initial investment (‘Farming a bumper harvest’, 14 November 2022). Factoring in dividends, the holding has delivered a 42 per cent total return (TR), during which time the FTSE Aim All-Share TR index has shed 35 per cent of its value.

However, although the long-term investment case remains intact, and Wynnstay is valued around 20 per cent below both its net asset value and five-year average cash profit multiple to enterprise valuation, the lack of a share price catalyst is likely to limit the upside. Take profits.

■ 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. The books are priced at £16.95 each plus postage and packaging (P&P) of £3.95 [UK], or both books can be purchased for the promotional price of £25 plus P&P of £5.75.