Wynnstay's post-Pets appeal

Following a lengthy malaise, the prices that farmers can charge for their products is on the rise, with total income from farming hitting a 10-year high of £5.7bn in 2017. This should encourage more investment in farms, which should benefit both of Wynnstay's divisions. Strong half-year results reported earlier this month suggest this process is already under way.

Agriculture represents nearly three-quarters of Wynnstay’s turnover, but just less than two-fifths of profit.  By operating both a feeds and arable business, the agriculture division enjoys a natural hedge against the weather: when conditions are poor, farmers buy more feed as they keep their animals indoors; but when the weather is good, they buy more arable seeds to grow their own animal feed outdoors. The efficiency of the division is aided by Wynnstay’s two feed mills and one blending plant being strategically located close to its stores.

The higher-margin specialist retail division operates country shops selling a wide range of rural products, ranging from shot for your 12-bore, to saddles for you pony and shears for your flock. Growth has been given a boost by the £800,000 acquisition of eight stores from Countrywide Farmers in April. Wynnstay’s network of 60 stores throughout Wales, central and southern England tailor their stock to suit demands of the demographic, with a focus on non-discretionary farmer necessities, which account for about four-fifths of sales.

Wynnstay’s recent interims showed signs of a bright future post-Pets. On the back of a 10 per cent increase in group revenues and an 11 per cent rise in underlying EPS, analysts pushed up forecasts for both the group's divisions. Since the start of 2018 EPS forecasts for the current year have been increased by 7 per cent and for the 2019 financial year by 9 per cent. Given the strong trading conditions and expectations of an increased contribution from the eight recently acquired stores come 2019, there could be scope for more upgrades as the year continues. 

Despite the positives, the shares look very cheap by historic standards. Based on a multiple of 13 times consensus forecast earnings for the next 12 months, the valuation is in the bottom five per cent of the five-year range and offers 17 per cent re-rating upside were the shares to get back to the mid-range rating of 15.3 times earnings. One potential reason for the low rating is Brexit, which presents a degree of uncertainty. On the flipside, uncertainty around trade deals demonstrates the importance of the domestic agriculture supply chain, which Wynnstay is an important part of.