Wynnstay Group (WYN)

 

Ten years of Wynnstay

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Steadyish growth in profit has earned Wynnstay a reliable reputation. A closer look at the numbers reinforces it.

This is going to be a fairly speculative post, as I haven’t yet read Wynnstay’s older annual reports. I’ve just sucked the data out of them.

Wynnstay manufactures, distributes and retails animal feed, seed, fertiliser and agricultural raw materials. It’s customers, farmers, are under constant pressure to reduce prices. Demand is also influenced by capricious factors like weather and blight, and Wynnstay’s raw materials are commodities that fluctuate in price due to global supply and demand. Yet over the last ten years Wynnstay’s adjusted profit has grown steadily:

Profitability fluctuates, perhaps in response to market conditions, but it’s always been adequate (although perhaps not in 2006, when profit was lower than in the following borderline year) because, the company says, it serves a broad range of markets, arable, poultry, dairy and meat, with a broad range of feeds, fertilisers and raw materials. When dairy farmers aren’t buying so much, poultry farmers may well be:

Cash flow is another story though. The judgements accountants make in determining profit match sales to expenses to give a truer impression of how the business is performing than the cash entering and leaving its bank accounts. If you were to go judge Wynnstay by its performance in cash terms you might be more alarmed. This chart shows how much cash Wynnstay earned, strictly cash from operations less capital expenditure, as a proportion of operating profit:

The chart shows that profit and cash bear very little relation. In some years, Wynnstay earns more cash than the accounts recognised as profit. In others it earned less. In two years what it earned in cash barely covered its expenses (and didn’t cover the dividend).

Colouring the chart red is probably alarmist. On average the company’s cash return was 71% of adjusted profit, which is not great, but not atypical. Some of the capital spending will be on new machines, or mills, or retail stores that will increase the profit and cash the company returns in future. By rights it should not be included in the calculation, but I don’t have enough information to separate out. The fluctuations remind me of Treatt’s cash flow. Treat processes essential oils, flavours, from citrus oils. Perhaps like Treatt, Wynnstay, which processes grain, feed, and fertiliser, stockpiles the commodities it processes, tieing varying amounts of cash up in stock depending on market prices and expectations of demand that may or may not be fulfilled.

The company had more cash than borrowings at the year end in October 2015, and, even after adding roughly capitalised lease obligations, its overall financial liabilities are growing more slowly than the business:

Although it’s possible that recent declines in profitability will continue, I think it’s more likely they will fluctuate around 10% return on capital. While diversification irons out some of the volatility in the returns from sectors, it can’t quash it completely.

The fact that Wynnstay is generally profitable, in accounting and cash terms, and financially stable, as well as the its scale and retail outlets, which may give it an advantage over smaller rivals, justifies my continuing interest.

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