Wincanton — Update 22 August 2016

Wincanton

Strategy paying dividends

Post result forecast update

Industrial support services

22 August 2016

Price	195p
Market cap	£241m

Net debt (£m) as at 31 March 2016		39.5

Shares in issue	123.7m
Free float	92%
Code	WIN

Primary exchange	LSE
Secondary exchange	N/A

Share price performance

%	1m	3m	12m
Abs	10.2	17.5	0.1
Rel (local)	6.9	4.9	(5.8)

52-week high/low

210p

148.5p

Business description

Wincanton is a leading provider of supply chain solutions in the UK and Ireland. A comprehensive warehousing and transport network allows a flexible logistics solution across a range of industries. A new divisional structure has been implemented: Retail & Consumer; and Industrial & Transport.

Next events

Interim results

10 November 2016

Analyst

Roger Johnston

+44 (0)20 3077 5722

industrials@edisongroup.com

Edison profile page

Wincanton is a research client of Edison Investment Research Limited

The resumption of a dividend following strong results is a clear signal that Wincanton has moved from deleveraging and addressing legacy issues to growth. With the £60m Records Management (WRM) disposal and forthcoming integration of the remaining specialist businesses into core logistics, Wincanton is positioning to leverage group-wide integrated opportunities. Recent contract wins have reconfirmed the longstanding relationship-based model, while the reorganisation into retail & consumer and industrial & transport segments will enable further market focus and service development to drive both revenue and efficiency.

Year end	Revenue (£m)	PBT* (£m)	EPS* (p)	DPS (p)	P/E (x)	Yield (%)
03/15	1,107	31.4	21.1	0.0	9.1	N/A
03/16	1,147	35.3	23.9	5.5	8.1	2.8
0317e	1,139	36.6	24.2	8.4	8.0	4.4
03/18e	1,162	39.6	26.1	9.0	7.4	4.7

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

Positive results achieved and dividend resumed

Full year results confirmed significant progress. Revenues increased 3.6% to £1.15bn (+4.4% l-f-l excluding WRM), while underlying operating profit was up 2.4% to £50.9m (+5.4% l-f-l). Underlying PBT grew 12.4% to £35.3m driven by lower financing costs due to reduced average net debt and prior year refinancing. Underlying EPS increased 13.3% to 23.9p and closing net debt was £39.5m (2015: £57.6m). This reflected good cash generation offset by onerous lease settlements, while the WRM proceeds were utilised to reduce the overall level of indebtedness and to normalise year end working capital resulting in lower intra-period volatility of net debt. This improved position allowed the board to recommend a final dividend of 5.5p, with a progressive policy in-line with earnings expected in future years.

Strategy to drive growth opportunities

Wincanton’s strategy is to deliver increasingly efficient contract logistics while seeking to expand its share of business with customers. In addition the group is acquiring new customers through better prospecting and service innovation. Allied to this, the group is driving ongoing cost reduction including through the integration of the remaining specialist businesses post the WRM disposal into the core contract logistics business. Each of these steps is designed to drive further growth and cash generation allowing newer areas to be improved such as eCommerce.

Valuation: Transitioning from turnaround to growth

With leverage under control, operating performance back on track and a clear strategy, cash generation is set to improve as legacy drains on cash subside. As a result, we believe that the Wincanton investment case is moving from a turnaround to growth focus. Our updated valuation range is 242p/share to 271p/share (from 219p-242p) based on relative peer multiples and DCF-based fair values respectively.

Positioned to drive further growth

Wincanton’s management has demonstrated the ability to reposition the group from a position of turnaround to growth through a period of significant focus on reducing debt through disposals and addressing legacy issues in performance, pensions and onerous leases. The full year results demonstrated that the focus is now on driving enhanced performance and growth across the group as a whole following the disposal of the less aligned Records Management business.

With recent contract renewals achieved with Sainsbury’s and the Co-op taking these clients to over 25 years of partnerships, Wincanton has shown that its strategy of long-term partnering continues to form an integral part of its customer’s supply chains even in, and possibly even more so, a post-Brexit environment. With innovative new solutions being developed by the group and areas for expansion identified including eCommerce, we believe that Wincanton is entering a long-term growth phase.

Full year results demonstrated a new phase and focus

The group delivered a solid set of full year results from which the group has a strong base to focus on further expanding the business:

■

Revenues increased by 3.6% to £1,147m (2015: £1,107m), or up 4.4% when excluding the disposed WRM business from both periods. There were strong wins in contract logistics including new wins with B&Q and Halfords and an extension and expansion of scope with BAE Systems. Contract renewals were also achieved with long-standing clients such as HJ Heinz and Müller Milk, while volume growth was strongest in both general merchandise and construction markets. Overall growth was partially offset by contract losses such as the end of activity with Morrisons following its exit from convenience stores as well as the partial inclusion of the WRM business for eight months, its contribution falling from £22.4m to £14.9m.

■

Underlying operating profit improved by 2.4% to £50.9m (2015: £49.7m) at underlying operating profit margin of 4.4% (2015: 4.5%). Excluding WRM from both periods, underlying operating profit increased by 5.4% to £48.7m (2015: £46.2m) at a constant margin of 4.3%. Margins at contract logistics were resilient throughout the year at 4.9% (2015: 4.8%) while the specialist businesses suffered both from the losses sustained in the Pullman Fleet Services business in H116 due to previously flagged onerous contracts as well as the disposal of WRM. Margins in this division dropped by 120bps to 1.5%. Encouragingly following resolution of the onerous contracts and introduction of a new management team at Pullman, the business returned to profitability in H2.

■

Following a £2.7m decrease in net finance costs to £15.6m (2015: £18.3m) as a result of lower average net debt throughout the year at £108m (2015: £136m), the prior year’s refinancing and reduced non-cash items, and underlying PBT increased by 12.4% to £35.3m (2015: £31.4m). The tax charge was £4.7m (2015: £5.6m) reflecting a reduced underlying tax charge of 18.4% (2015: 22.0%) due to the drop in the main UK corporation tax rate together with the utilisation of brought forward losses. As a result underlying EPS increased by 13.3% to 23.9 (2015: £21.1p).

■

Net debt at the year-end dropped to £39.5m (2015: £57.6m) reflecting a net cash inflow of £18.1m for the year. This reflects cash generated by operations offset by the settlement of a number of onerous lease liabilities in H2 (£7.7m). Cash received from the disposal of WRM was £55.7m was used for debt repayment after transaction costs and tax liabilities of £6.1m and incremental pension deficit reduction contributions of £7.0m. The full effect is partially offset in year-end net debt levels as the group took the opportunity to normalise working capital positions at year end with an associated reduction in trade payables of £37.3m from last year. The volatility between average and year-end net debt will therefore be reduced further.

Having taken into account the strong strategic position of the group with all areas now performing well, debt position under control with underlying cash generation improving and onerous property leases now reduced by 70%, a final dividend of 5.5p/share was reintroduced. This is slightly ahead of our expected schedule and we feel is an important step for the group in re-establishing its credentials with long-term investors.

The group announced its dividend policy which will be progressive and broadly linked to underlying earnings with a 1/3:2/3 interim to final split to be paid in January and August respectively.

Forecasts show further progress anticipated

We have updated our forecasts to reflect full year results, recent contract awards and the AGM statement that highlighted that the impact of Brexit is being monitored but at this stage is not expected to have a material impact with no direct foreign currency exposure and a large proportion of open book contracts. Exhibit 1 below highlights our updated forecasts:

Exhibit 1: Updated Edison forecasts

(£m)	2015	2016e old	2016a	2017e old	2017e new	2018e
Contract Logistics	928.8	978.5	979.2	998.1	998.8	1018.8
Specialist businesses	178.6	168.2	168.2	140.0	140.0	143.4
Group Revenues	1107.4	1146.7	1147.4	1138.1	1138.8	1162.1
Contract Logistics	4.8%	5.0%	4.9%	4.6%	4.8%	4.7%
Specialist businesses	2.7%	0.4%	1.5%	1.7%	1.6%	2.5%
Group margin	4.5%	4.3%	4.4%	4.2%	4.4%	4.4%
Contract Logistics	44.8	48.8	48.4	45.8	47.9	47.9
Specialist businesses	4.9	0.7	2.5	2.4	2.2	3.6
Group EBIT	49.7	49.4	50.9	48.2	50.2	51.5
Amortisation of acq'd intangibles	-6.5	-4.6	-4.5	-4.4	-3.4	-3.4
Exceptionals	0.0	0.0	35.0	0.0	0.0	0.0
Net interest	-18.3	-16.4	-15.6	-14.9	-13.6	-11.9
Adjusted pre-tax profit	31.4	33.1	35.3	33.3	36.6	39.6
Tax reported	-5.6	-5.7	-4.7	-5.8	-5.6	-6.3
Tax rate underlying (%)	22%	20%	18%	20%	18%	18%
Adjusted profit after tax	24.5	26.4	28.8	26.5	29.9	32.3
Minorities	0.0	0.0	0.0	0.0	0.0	0.0
Net profit	24.5	26.4	28.8	26.5	29.9	32.3
EPS adjusted (p)	21.1	22.3	23.9	22.4	24.2	26.1

Source: Edison Investment Research

The main differences between our old and new FY17 forecasts are as follows:

■

Margin: We forecast that contract logistics margin will remain reasonably consistent level for the foreseeable future with continued cost efficiency measures being implemented across the group to remain competitive.

■

Net finance charges: With the full year effect of reduced average net debt yet to be fully reflected in the P&L and a better financial performance in FY16, we have reduced our assumed finance costs in by a further £1.3m in FY17, falling further in FY18 as further debt reduction is achieved.

■

Underlying tax rate: With a lower tax rate than we forecast in FY16 and with the drivers of that expected to extend over the next few years, we have lowered our assumed tax rate from 20% to 18% in each of the next two years.

■

EPS: Due to the combination of the above factors and reflecting the 7% outperformance on our FY16 forecast, we have increased our FY17 EPS forecast by 8% to 24.2p/share. We have also instigated our FY18e forecasts calling for a further 8% increase to 26.1p/share.

Strategic pillars remain, restructuring drives further opportunity

Wincanton has a clear strategy to drive top and bottom line growth which remains intact following the disposal of WRM, based around four clear pillars:

■

To deliver improvements to customers in existing operations and retain existing contracts

■

Improving ‘share of wallet’ with existing customers and focusing on cross-selling services

■

Acquiring new customers through improved prospecting and innovative service propositions

■

Driving on-going cost reductions and cash generation

Full year results indicated that Wincanton has delivered against these pillars and the group announced that it has moved into a new phase of development to further accelerate growth and drive increased efficiency across the group.

From 1 April, the group has integrated the remaining specialist businesses, i.e. Containers and Pullman Fleet Services into the core contract logistics business. This is achievable due to the fact that there is a considerable overlap of customers and capabilities across the remaining portfolio, providing consolidation benefits. The group will be organised around two sectors designed to gain the most form a more integrated approach to business:

■

Retail & Consumer. The existing retail business will cooperate more closely with the consumer products business to provide a through product approach throughout the supply chain from producer to retailer. This will see a proliferation of opportunities in areas such as multichannel operations where Wincanton will increasingly bring innovative solutions as it further develops its e-fulfilment capabilities. A good example of this is the “pop up” seasonal peak operation delivered by Wincanton on behalf of Amazon utilising space within its warehouse operations to deliver a short-term surge volume capacity in a fast-start operation.

■

Industrial & Transport. This sector will seek to provide a more integrated supply chain solution that will better utilise capabilities and assets across the business. The former specialist businesses will be included in this sector to further optimise transport operations for its client base.

While we have not adjusted our divisional forecasts to the new reporting structure at this stage but will do so as specific details become available.

Valuation: From turnaround to growth

Through demonstration of robust results, continued contract renewals and with a strategy to deliver growth and increased efficiency, coupled with the resumption of a dividend, we believe that Wincanton has moved from a recovery play to a sustained growth and dividend stock. The current rating of 6.2x 2016e EV/EBITDA (eg FY to March 2017e), as shown in Exhibit 2 below, still remains at a significant discount to international peers.

Exhibit 2: Global/UK comparator group

			2016e	2017e	2016e	2017e	2016e	2017e	2016e	2017e
	Price (local ccy)	Market cap (£m)	P/E (x)		EV/Sales (x)		EV/EBITDA (x)		EV/EBITA 9x)
Global Logistics Peers
Deutsche Post (DHL)	28	25702	13.8	13.0	0.6	0.6	7.2	6.8	10.1	9.4
Kuehne & Nagel	138	11460	22.7	21.5	0.8	0.8	14.0	13.3	16.7	15.9
DSV	328	6230	26.7	21.1	0.9	0.8	15.6	12.6	21.3	15.7
Panalpina	135	2209	34.2	24.4	0.5	0.5	16.4	12.6	23.2	16.2
XPO Logistics	36	2776	36.8	20.6	0.6	0.6	7.2	6.2	16.0	12.3
Average			26.8	20.1	0.7	0.7	12.1	10.3	17.5	13.9
UK Peer Group
Clipper Logistics	198	315	19.2	15.6	1.1	1.0	12.9	11.2	22.3	18.3
DX Group	18	37	4.0	3.7	0.1	0.1	2.0	1.9	3.2	2.9
UK Mail	314	173	20.4	14.5	0.4	0.4	7.0	6.2	15.3	10.7
Average			14.5	11.2	0.5	0.5	7.3	6.4	13.6	10.6

Wincanton	193	235	8.1	8.0	0.2	0.2	4.3	4.2	5.2	5.3
Wincanton (inc pension deficit + avg debt)					0.3	0.3	6.2	6.1	6.9	7.0

Source: Edison Investment Research, Bloomberg consensus. Note: Peers mainly Dec year end; Wincanton March year end (2016e is our FY17 estimate); estimates are not calendarised. Share prices at 18 August 2016.

We continue to use the same methodology to value Wincanton as in our March 2016 initiation which yields an increased fair value range of 242p/share (40% discount to global peers on a 7.2x FY16e EV/EBITDA basis) to 271p/share (DCF as shown in Exhibit 3 below) as a result of our increased forecasts and lower pension deficit.

Exhibit 3: Updated DCF fair value, 2016-2021e, WACC 9%, terminal growth rate 1%

Year End 30 March (£m's)	2016	2017e	2018e	2019e	2020e	2021e	Terminal Value
EBIT	50.9	50.2	51.5	53.2	56.1	59.2
Less cash taxes	-6.5	-9.1	-9.4	-10.6	-11.2	-11.8
Tax rate %	18%	18%	18%	20%	20%	20%
NOPLAT	44.4	41.0	42.0	42.6	44.9	47.3
Working Capital	-62.7	-4.9	-7.7	-7.0	-4.8	-5.0
Add back depreciation	14.5	13.3	13.4	15.1	15.6	16.1
Less capex	-10.0	-12.5	-13.0	-14.5	-16.5	-18.5
Free cash flow	-13.8	37.0	34.7	36.2	39.2	39.9	37.7

WACC	9.0%	9.0%	9.0%	9.0%	9.0%	9.0%	9.0%
Year		0	1	2	3	4
Discount factor		1.00	0.92	0.84	0.77	0.71	0.71
Discount cash flow		37.0	31.9	30.4	30.2	28.3	333.5
NPV		491.2	454.3	422.4	392.0	361.8	333.5


DCF valuation	£m	p/share				Discount rate (post-tax, nominal)
EV	491.2	397				8.0%	8.5%	9.0%	9.5%	10.0%
Net debt - adjusted for disposal + average debt	69.5	56		Terminal growth	0.0%	281	259	239	221	205
Pension Deficit - net post tax	86.6	70			0.5%	301	276	254	235	217
Equity value	335.1	271			1.0%	324	296	271	250	231
Number of shares ('000)	123.7				1.5%	350	319	291	267	246
Equity value (p/share)	271				2.0%	381	345	313	286	262
Current share price	193
Upside / (downside)	40%

Source: Edison Investment Research

As Wincanton is able to demonstrate the benefits achieved from the integrated supply chain and market focused sector approach, we believe a further re-rating may occur. In addition, with a greater flexibility in financing now available to the group, limited scale investments to protect defend and enhance the group’s positioning may well be considered.

Exhibit 4: Financial summary

	£m	2013	2014	2015	2016	2017e	2018e
Year end 31 March		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		1,086.8	1,098.0	1,107.4	1,147.4	1,138.8	1,162.1
Cost of Sales		(1,022.8)	(1,030.0)	(1,039.5)	(1,073.2)	(1,075.2)	(1,079.3)
Gross Profit		64.0	68.0	67.9	74.2	63.5	82.8
EBITDA		60.4	61.2	62.0	62.5	61.4	62.8
Operating Profit (before amort. and except.)		45.3	48.0	49.7	50.9	50.2	51.5
Intangible Amortisation		(7.3)	(6.5)	(6.5)	(4.5)	(3.4)	(3.4)
Exceptionals		0.0	15.8	0.0	35.0	0.0	0.0
Other		0.0	0.0	0.0	0.0	0.0	0.0
Operating Profit		38.0	57.3	43.2	81.4	46.8	48.1
Net Interest		(24.0)	(22.4)	(18.3)	(15.6)	(13.6)	(11.9)
Profit Before Tax (norm)		21.3	25.6	31.4	35.3	36.6	39.6
Profit Before Tax (FRS 3)		14.0	34.9	24.9	65.8	33.2	36.2
Tax		(3.9)	(7.5)	(5.6)	(4.7)	(5.6)	(6.3)
Profit After Tax (norm)		15.4	19.3	24.5	28.8	29.9	32.3
Profit After Tax (FRS 3)		10.1	27.4	19.3	61.1	27.5	29.9
Minority interest		0.0	0.0	0.0	0.0	0.0	0.0
Net Income (norm)		15.4	19.3	24.5	28.8	29.9	32.3
Net Income (FRS 3)		10.1	27.4	19.3	61.1	27.5	29.9

Average Number of Shares Outstanding (m)		115.8	116.1	116.3	120.5	123.7	123.7
EPS - normalised		13.3	16.6	21.1	23.9	24.2	26.1
EPS - normalised and fully diluted		12.8	15.3	18.9	22.3	22.6	24.4
EPS - (IFRS)		8.7	23.6	16.6	50.7	22.2	24.2
Dividend per share		0.0	0.0	0.0	5.5	8.4	9.0

Gross Margin (%)		5.9	6.2	6.1	6.5	5.6	7.1
EBITDA Margin (%)		5.6	5.6	5.6	5.4	5.4	5.4
Operating Margin (before GW and except.) (%)		4.2	4.4	4.5	4.4	4.4	4.4

BALANCE SHEET
Fixed Assets		220.4	191.3	185.4	148.5	144.1	140.2
Intangible Assets		114.4	105.5	96.8	90.0	84.5	79.0
Tangible Assets		73.1	61.7	58.2	35.6	36.7	38.3
Investments		0.0	0.1	0.1	0.1	0.1	0.1
Other		32.9	24.0	30.3	22.8	22.8	22.8
Current Assets		254.9	273.6	246.8	180.5	190.4	198.0
Stocks		7.1	6.4	5.8	4.8	4.8	4.8
Debtors		81.2	81.5	86.5	89.2	95.6	100.4
Cash		103.2	131.9	105.8	36.3	36.3	36.3
Other		63.4	53.8	48.7	50.2	53.7	56.5
Current Liabilities		(356.8)	(368.9)	(379.5)	(315.5)	(324.8)	(336.1)
Creditors		(90.2)	(81.4)	(84.6)	(73.5)	(75.3)	(78.4)
Short term borrowings		(13.9)	(12.1)	(35.3)	(20.4)	(20.4)	(20.4)
Other		(252.7)	(275.4)	(259.6)	(221.6)	(229.1)	(237.3)
Long Term Liabilities		(405.0)	(346.0)	(314.4)	(197.8)	(179.4)	(165.4)
Long term borrowings		(196.9)	(184.7)	(128.1)	(55.4)	(44.9)	(34.9)
Other long term liabilities		(208.1)	(161.3)	(186.3)	(142.4)	(134.5)	(130.5)
Net Assets		(286.5)	(250.0)	(261.7)	(184.3)	(169.7)	(163.4)

CASH FLOW
Operating Cash Flow		36.9	70.4	46.8	3.6	59.6	58.1
Net Interest		(14.2)	(14.0)	(12.8)	(9.3)	(7.2)	(5.5)
Tax		(0.3)	(2.4)	(4.2)	(3.1)	(5.7)	(5.7)
Capex		(4.6)	(1.7)	(9.7)	(6.0)	(12.5)	(13.0)
Acquisitions/disposals		0.0	0.0	0.0	55.7	0.0	0.0
Financing		(12.5)	(11.6)	(12.1)	(24.3)	(13.8)	(13.8)
Dividends		0.0	0.0	0.0	0.0	(9.8)	(10.2)
Net Cash Flow		5.3	40.7	8.0	16.6	10.5	10.0
Opening net debt/(cash)		114.5	107.6	64.9	57.6	39.5	29.0
HP finance leases initiated		0.0	0.0	0.0	0.0	0.0	0.0
Other		1.6	2.0	(0.7)	1.5	0.0	0.0
Closing net debt/(cash)		107.6	64.9	57.6	39.5	29.0	19.0

Source: Edison Investment Research

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Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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