Boutique investment bank Liberum has raised its target price for logistics company Wincanton PLC (LSE:WIN, OTC:WNCNF) from 390p to 430p, reiterating its 'buy' recommendation.
The upgrade comes on the heels of a significant development in Wincanton's financial health.
According to Liberum, the company's latest triennial pension valuation revealed a surplus of £3.9 million as of March 2023, a substantial improvement from a £154 million deficit in March 2020.
This newfound surplus has several implications. Firstly, Wincanton is no longer required to make cash contributions to its pension scheme until at least 2026.
This is a marked improvement, considering the company had previously been obligated to contribute £23.6 million in the current financial year, with £25 million annual contributions in subsequent years, indexed by the Retail Price Index (RPI).
The cessation of these contributions is expected to significantly boost Wincanton's free cash flow.
Liberum sees this as an opportunity for the company to enhance cash returns to shareholders while continuing to invest in organic growth and maintaining a low level of financial leverage.
"The low rating of the shares suggests to us that share buybacks would be an attractive method of returning cash to shareholders, albeit constrained by the liquidity of the shares," Liberum said in a note to clients.
Moreover, previous limitations on distributions to shareholders have been lifted, offering further potential for shareholder value.
While there are backstop arrangements to review contributions in case of a significant deterioration in the pension scheme or an increase in Wincanton's financial leverage, Liberum believes these are unlikely to be triggered.
The shares were lifted by the news, rising 12% to 274.7p. However, that's still a 56% discount to Liberum's price target.