Wynnstay has now released its interim results for the year ending 2016.
Revenues decreased when compared to last year as a £4.8M growth in retail revenue reflecting the £6M received from the Agricentre acquisition, was more than offset by a £12.2M decline in agriculture revenue reflecting commodity price depreciation and lower volumes of manufactured feed products. Depreciation increased by £133K but other cost of sales fell by £7.8M to give a gross profit £310K above that of last time. Manufacturing and selling costs increased by £787K and admin expenses were up £413K, although share based payments fell by £114K which meant that operating profit fell by £774K. After a £30K decline in finance expenses and a £212K fall in tax costs the profit for the half year period came in at £3.3M, a decline of £535K year on year.
When compared to the end point of last year, total assets increased by £4M driven by an £8.9M growth in receivables and a £2.3M increase in inventories, partially offset by a £7M fall in cash. Total liabilities also increased during the period as a £2.8M growth in payables was partially offset by a £950K decline in borrowings. The end result was a net tangible asset level of £66.8M, a growth of £2.2M over the past six months.
Before movements in working capital, cash profits declined by £692K to £5.6M. There was a large cash outflow from working capital with a particularly big increase in receivables (although this was much less than last time due to commodity price deflation) which meant that after both interest and tax payments reduced slightly there was a net operating cash outflow of £3.7M, an improvement of £4.4M year on year. The group spent £603K on property, plant and equipment and before financing there was a cash outflow of £4.1M. The group also spent £320K on finance leases, £1.4M on loan repayments and £1.4M on dividends to give a cash outflow for the period of £7M and a cash level of £2.7M at the period-end.
The climate of poor output prices for farmers, which relates to an imbalance in world markets is now in its second year and remains an issue for the whole industry.
The profit from the agriculture business was £1.8M, a decline of £408K year on year driven by lower demand for dairy related feed products. Output prices remain below the realistic cost of production, which is particularly evident in the dairy sector and resulted in the UK-wide reduction in demand for feed products. Grain prices also remain low although 2015 yields were good, and have led to increased trading volumes in the season. The combination of subdued market sentiment and a delayed spring tempered demand for arable inputs in Q1 but demand gained momentum in Q2 and the resultant spot trade was encouraging. First half sales for arable inputs were therefore ahead of the same period last year but the shift in buying patterns added to distribution costs.
The challenges faced by customers supplying the dairy market resulted in a reduction in demand for compound and blended feeds, although this was partly offset by an increase in demand for sheep feeds. Reflecting the national trend, overall feed volumes were lower than last year but outperformed the 2014 season. Pressure on margins during the period was partly offset by efficiency gains and a reduction in third party manufacture. The group continues to invest in its feed mills and plans are underway for a new packaging facility which will support distribution for the expanding network of retail stores.
Sales of fertilizer gained momentum in Q2 and the volume of both traded raw materials for feed and of specialist products has been buoyant. As expected, however, overall margin pressure has reduced the contribution from the Glasson business compared to last year’s strong performance.
After a relatively slow start, demand for arable products was buoyant in the spring and the resultant spot market was very active. Strong cereal and herbage seed sales helped drive total arable product volumes and sales above last year’s level but the late spring delayed demand for agrochemicals. Direct to farm fertilizer sales were also very strong in Q2, resulting in higher volumes in the first half as a whole. The large grain harvest from the 2015 season contributed to an increase in the volume of cereals marketed through the Grainlink and Woodheads businesses. There is still a reasonable volume of grain on farms which, along with the anticipated 2016 harvest, creates an opportunity for trading into the next financial year.
The profit from the specialist retail business was £2.4M, a fall of £445K when compared to the first half of last year, affected by the adverse impact on farm incomes as well as the initial higher costs relating to the Agricentre acquisition and the new Just for Pets stores with the acquisition expected to make a positive contribution in 2017.
The network of Wynnstay stores now totals 51 outlets. The integration of the recently acquired Agricentre business is underway and the stores have now been rebranded. The acquisition takes the business into a major new geographic region, which encompasses the South and South West, and part of the integration initiative will be to increase the range of products available throughout the trading area. Overall sales increased by 10.7%, reflecting the acquisition but there was a small reduction in like for like sales reflecting a reduced level of spending in the livestock sector, including a reduction in collected fertilizer and some hardware products.
During the period, the number of Just for Pets outlets increased to 23 stores with a new store opened at Nottingham following two new stores at Cambourne and Reading in H2 of last year. Like for like sales reduced slightly in the period and the operating profit contribution from the business was affected by costs associated with the newer stores. In May, the group established a new concept store at a rural destination centre, which has taken store numbers to 24. This has been branded Bessie and Boo and is a pet boutique store catering for the leisure shopper. Early signs are encouraging and the group are considering opportunities to replicate the model.
They also plan to open further new stores which follow the traditional format in the second half of the year.
The group does seem to have a fairly substantial capital expenditure in the second half with contracts placed for £2M compared to just £262K at this point of last year.
The agricultural environment remains difficult for the group’s customers and there are only limited signs of improvement in near term trading conditions. The outcome of the recent EU referendum now brings to the fore the question of the ongoing level of economic support for agricultural and rural communities. While this brings uncertainty, the industry expects some degree of financial support to continue given the sector’s strategic importance. As the exit agreement and new trade deals are negotiated, the UK will remain an efficient producer of agricultural products to the domestic and world markets. There is no doubt, however, that the requirement for further efficiency within all parts of the industry will be an important aspect for all businesses. Overall the group is positioned to achieve its targets for the full year.
At the current share price the shares trade on a historic PE ratio of 11.5 but this rises to 13.5 on the full year consensus forecast. After an 8.1% increase in the interim dividend, the shares are yielding 2.9% which increases to 3% on the full year forecast. At the period-end the group had a net debt position of £3.9M compared to £8.1M at the same point of last year.
Overall then this has been a tricky half year period for the group. Profits were down and although net assets grew and the operating cash outflow improved, this was due to a smaller increase in receivables and cash profits fell. The agric division suffered due to lower demand for dairy feed and the retail side of the business saw profits decline as a result of lower farm incomes and the increased costs from the new stores.
Going forward, the new pet store concept sounds interesting and the newly acquired stores should be contributing but the agricultural environment remains difficult and the EU Brexit vote doesn’t help farming sentiment either. With a forward PE of 13.5 and yield of 3% these shares probably reflect these issues and a recovery in the dairy market may mean these shares are pretty good value. One to watch closely I think.