Wincanton (WIN)

Gotta have faith

Most people living in the UK will have heard of Wincanton, or a least encountered one of their lorries on a dreary motorway. They’re one of those companies that sits behind the scenes – as you’d probably expect from a logistics company – but nonetheless provide a service that is vital for the more consumer facing side of things.  They keep the shelves stocked at B&Q, helped Supergroup set up their supply chain, and have a logistics contract in place with Dairy Crest; the last two being stocks I’ve covered, and the first owned by a group (Kingfisher) that is relentlessly covered in most stocks & shares publications. That’s not me picking and choosing to aggrandise them, either – all the major supermarkets also have some involvement with Wincanton. The reason for that, I’m sure the Chairman would tell us, is his observation that:

Wincanton has formidable strengths in its chosen sectors and retains  an excellent reputation for operational delivery in the  marketplace.

They’re a market leader, basically, and they’re entrenched. Splendid. Only one small problem I have with everything that’s been said so far, then, before I sign on the dotted line with my broker – how are they doing so badly?

You won’t be surprised by the answer – the usual combination of a chunky debt pile and a downturn in, well, the economy. It sounds a little vague and imprecise, but in reality logistics companies find their fortunes rather closely tied to that ethereal beast. Whenever things in general slow down, it’ll always filter back to the people moving things from place to place. Just look at shipping! If you want a visual demonstration of that, it doesn’t come much better than the operating/net profit lines of the graph above and to the right. The big revenue drop-off, I should add, came about from Wincanton dumping some of their peripheral operations and focusing on the UK. That seems necessary and logical.

The scale of debt here, though, is more significant than a lot of companies I’ve seen, and probably says something more about the business. They recently refinanced, and though they’re sitting pretty close to their covenants, companies have been dragged down by lenders with less worrisome debt problems than this. The banks obviously feel Wincanton’s strategy has some legs to it, and that central position in the middle of a number of company’s supply chains gives it some power. Also relevant is probably the fact that a large amount of Wincanton’s liabilities are on the trade and other payables line – including a large amount of deferred income and accruals. Worrying for investors, slightly less so for their lenders.

Just focusing on tangibles leaves that balance sheet I’ve reproduced above looking pretty dire. Around a £400m equity deficit, for a company that was earning ~£20m a year in the good times pre-recession. Suffice to say, we need better than that going forward, so the recession will have had to have a positive effect on how the business is run. Disposing of their European operations may be a step in that direction, allowing management to focus on profitability in the UK.

If the debt on the balance sheet isn’t offputting enough, though, scanning down to the size of the pension scheme probably is – the current PV of their obligations sits at £774m. A scheme this large means even small movements in the value of either the obligations or value of the assets affects the value of the company as a whole hugely. As I’ve said before, I should note that pension schemes and their valuations are still a puzzle I’m grappling with. The ‘sensitivity table’ here does a good job of explaining why – a 0.5% change in discount rate assumption changes the value of the group’s liabilities by about 8.5%; £66m. That is almost the entire current market value of the company’s stock! The same is true of inflation assumptions and all the rest of the accounting wizardry; the net result being that I’m not sure whether the current bizarre macroeconomic situation leaves pension funds a big cow to be milked or a timebomb to be locked up and ran from.

My conclusion won’t surprise you, then – I can’t see me going anywhere near Wincanton for a long time. The operational improvements look like they need to be so transformational relative to their historic profitability that I could never put my faith in them, the pension scheme fogs up the operational side of things with its enormous impact on the value of the group, and the debt just sits there, gnawing away. I feel like I’m missing something – I just don’t understand where the value for investors is.

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