Wynnstay Share Blog – Final Results Year Ended 2018

Wynnstay has now released their final results for the year ended 2018.

Revenues were up year on year due to a £53.5M increase in agriculture revenue and an £18.5M growth in specialist retail revenue.  Staff costs increased by £3.2M and other cost of sales were up £60M to give a gross profit £8.8M higher.  Operating lease rentals grew by £616K and other manufacturing, distribution and selling costs were up £6M with admin costs up £533K.  There was a modest £277K profit on the disposal of a property to give an operating profit £1.8M higher.  There was a small increase in finance costs and a growth in profits from joint ventures so after tax, the profit for the group was £7.7M, a growth of £1.4M year on year.

When compared to the end point of last year, total assets increased by £31.1M driven by a £22.2M growth in inventories, a £6.8M increase in trade receivables and a £1.3M increase in plant, machinery and office equipment, partially offset by a £2.2M decline in cash.  Total liabilities also increased during the period due to a £19.9M growth in trade payables.  The end result was a net tangible asset level of £76.2M, a growth of £5.3M over the past six months.

Before movements in working capital, cash profits increased by £2.2M to £12.5M.  There was a cash outflow from working capital and after tax payments increased by £178K and interest payments were up £64K, the net cash from operations was just £966K, a decline of £3.7M year on year.  The group spent a net £1.8M on capex and £1M on acquisitions, although they did receive £755K of dividends from an associate to give a cash outflow of £1M before financing.  The group took out £3.5M of new loans in order to pay the £1.5M of finance lease payments, £2.5M of dividends and £1.2M loan repayments to give a cash outflow of £2.2M and a cash level of £6.7M at the year-end.

Feed sales set a new record and the Glasson business turned in an exceptional performance.  Both operations benefited from the prolonged dry weather conditions in 2018, which drove unseasonal demand for animal feed in the second half.  Sales of herbage seed also reached a new high with the same weather factors driving demand as farms replaced dried, worn out pasture.  The specialist agricultural merchanting division performed above expectations with most product categories benefiting from improved farmer sentiment. 

The profit in the Agriculture division was £4.3M, a growth of £949K when compared to last year with revenues up 19%.  This was driven mainly by increased demand across most product groups and commodity price inflation.  Both feed and arable activities performed above expectations with record sales of feed, milk replacers and herbage seeds.  Grain and fertilizer volumes were above last year’s levels but margins were squeezed as competitors chased market share. 

Within feed products, volumes reached a record level, some 6.4% ahead of last year.  This reflected strong demand, especially in the second half when the long dry summer limited farmer-grown forage, causing them to buy extra feed.  The increase in demand was seen across all sectors with an especially strong demand for poultry feed as many egg producers increased the size of their business.  They also experienced record sales of their calf feed and milk replacer products.  In addition, Bibby benefited from these trading conditions. The dry weather has caused a shortage of fodder for the winter months and they expect this to support ongoing feed demand.  The outlook for feed products remains strong. 

Glasson Grain delivered an exceptional performance with all activities outperforming budget.  The fertilizer operations benefited from the acquisition of a blending facility in Montrose and the integration of the FertLink joint venture manufacturing business. The addition of Montrose allowed them to trade with a new customer base and the business is now the second largest fertilizer blender in the UK.  Raw material commodity trading benefited from increased feed demand as a result of the dry weather and feed manufacturers achieved record production as a demand for the specialist feed products increased.

Within arable products. Overall seed sales for the year were very good.  While the first half of the year saw reduced activity in the seed operations due to the late wet spring delaying planting, the extended dry summer helped drive record herbage seed sales.  During the year they refocused the activities of Woodhead seeds and have brought it under the management of the main seed operation in Shropshire which resulted in lower cereal seed tonnage but a higher overall contribution. 

Fertilizer sales for the year were above budget and ahead of the previous year but there was downward pressure on margins.  The increase was driven by the busy spring period and the late summer surge as farmers strived to grow grass and forage following months of prolonged dry conditions.  A significant increase in fertilizer prices in the autumn reduced forward purchasing but they would expect this to translate into higher activity in Spring 2019.

They continue to develop their in-house grain marketing business, Grainlink, and have expended into Lincolnshire, opening a grain trading office in Grantham.  The new office markets grains and oilseeds, and also sells fertilizer and seed.  Trading volumes at the business were above last year and it has performed well in tougher trading conditions with the late spring and dry summer reducing yields and resulting in strong competition for the UK tonnage which put pressure on margins. 

The dry autumn has resulted in excellent drilling conditions across most of the country which bodes well for the seed and grain trading activities in 2019.  The warehouse expansion project in Shrewsbury has now been completed and the new facility is expected to become operational in the coming weeks.  It gives them additional capacity for both their seed processing activities and their depots and will improve operational efficiencies. 

The profit in the Specialist Agricultural Merchanting division was £5.5M, an increase of £796K year on year with revenues up 17%.  Acquisitions accounted for £7.8M of the increase and like for like sales were up £10.7M.  The acquisition of the eight former Countrywide depots in April have further extended the group’s geographic trading presence, particularly in the West country.  The integration of these are now substantially complete and their overall performance in the period was in line with budget.  They expect them to make a positive contribution to the division’s profitability in 2019.

Like for like sales across the depots increased by nearly 10%.  In particular feed, hardware, milk replacers and animal health products sales were very strong, reflecting improved trading conditions for farmers and weather-related purchases, particularly of bagged feed in the second half of the year.

The depots continued to benefit from sales driven by the increasing popularity of their specialist catalogues for dairy, beef and sheep farmers.  These have now been complemented by the recent launch of a poultry catalogue which will appeal to the growing number of egg producers in their trading area.  An online option is available for customers but currently the vast majority choose other purchasing routes.

During the year they relocated their Ruthin depot which resulted in increased trade.  They will continue to invest next year and to introduce new products.  In Youngs Animal Feeds they reorganised the business, transferring some feed manufacturing to Glasson.  Their Molichop branded feed range continues to be manufactured at Standon, however, and remains a market leading product. 

In May the group transferred the manufacturing operations of a joint venture business, FertLink, into Glasson Grain, and In June they sold their share of the business in Wynnstay Fuels.  As a result they now have three joint venture businesses, Bibby, Wyro and Total Angling, and one associate business, Celtic Pride.  The contribution from these businesses was higher than the previous year mainly because of an exceptional performance by Bibby Agriculture. 

Last year the group disposed of Just for Pets, the loss on disposal was £6.6M and the net cash outflow was £678K. 

Average UK grain prices were above the previous season, with milk prices stabilising to more realistic levels, and sheep and beef prices increasing significantly year on year.  The weaker pound has also benefited exports.  Against this, farmers faced rising costs, including fuel and fertilizer, and unexpected feed requirements driven by the dry weather. 

In November the group acquired a mill and related processing facilities in Montrose.  The acquisition will enable Glasson Grain to better service its customers in Scotland.  The consideration was £550K which will be payable by November 2020 contingent on the resolution of certain conveyancing issues which management expect to be resolved within the three year period.  The mill made a profit of £318K in the time since the acquisition. 

In April the group acquired eight former Countrywide Farmers agricultural retail stores for a consideration of £681K.  The stores made a combined loss of £182K in the period since acquisition.  In May the group acquired 50% of Fertlink, a joint venture between Glasson and NW Trading, for £100.  The acquisition will increase the fertilizer business’ sales volumes and allow it to better service the market in the East of the UK.  Since acquisition the business made a profit of £110K. 

In July Gareth Davies assumed the role of CEO, succeeding Ken Greetham who retired after ten years in the role.  Gareth joined the group in 1999 and over the past five years he has been joint MD of Wynnstay Agricultural Supplies.

Going forward, trading at the start of the new year is in line with management expectations.  The agricultural trading backdrop remains robust although farmers have seen higher costs, particularly in feed, mostly driven by the long dry summer weather.  While Brexit uncertainties remain, they are confident that British agriculture has positive long term prospects.

At the current share price the shares are trading on a PE ratio of 11.4 which is forecast to remain flat on next year’s consensus forecast.  After a 6% increase in the dividend the shares are yielding 3% which increases to 3.1% on next year’s forecast.  At the year-end the group had a net debt position of £977K compared to a net cash position of £4.5M at the end of last year.  

On the 29th January the group announced that non-executive director Steve Ellwood purchased 4,700 shares at a value of £20K.  This was his first purchase.  It was also announced that Chairman Jim McCarthy purchase 4,700 shares too and now owns 9,700 shares. 

On the 20th February the group announced that CEO Gareth Davies purchased 5,000 shares at a value of £21K.  He now owns 13,992 shares.

Overall then this has been a strong year for the group.  Profits were up, net assets increased and although the operating cash flow declined with no free cash being generated, this was due to working capital movements and cash profits improved.  Many of the businesses performed well due to the prolonged dry weather and improved farmer sentiment, although there was some pressure on fertilizer margins.  The old Countrywide Farmer stores made a loss but should start contributing going forward.  This company is always at the whim of the weather to some extend and Brexit is not helping sentiment but a forward PE of 11.4 and yield of 3.1% looks OK to me.

On the 21st March the group released a trading update.  Market conditions in Q2 have significantly weakened and trading is now behind seasonal norms.  This mainly reflects the abnormally warm winter months, which reduced the requirement for feed and other weather-related products.  It also contrasts significantly with last year, when the winter season was unusually long and harsh.  The recent weakening in farmgate prices, partly believed to be the result of Brexit, is also undermining farmer confidence.  The impact has been felt across both of the group’s divisions.  Results for the first half of the year are therefore expected to be substantially behind those of last year.  Given these prevailing uncertainties, the board currently believes it is prudent to anticipate the full year outturn is likely to be substantially below current market expectations.

Demand for arable products has gained momentum over recent weeks.  Margins for spring cereal seed are expected to be higher than last year although volumes will be lower because of the increased acreage sown to winter cereals.  Grain trading volumes continue to grow, but the expected margin pressures remain.  The Glasson business continued to perform well and the integration of the Countrywide operations is progressing as planned.  Some additional Brexit-related costs have been incurred during the period, mainly to ensure continuity of supply in certain sectors such as specialist imported raw materials.

This is a brutal profit warning and I’m out.  I should have heeded what the market was trying to tell me with the poor performance of the shares despite the recent good trading updates.


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