NWF Group: FY 2016 Results
UK-focused specialist agricultural and distribution business NWF Group (LON:NWF), has released preliminary results for the year ended 31 May 2016 (FY 2016).
• Group results: Revenues £465.9m, -5.4% YoY (FY 2015: £492.3m); adjusted operating profit £8.7m, +1.2% YoY (FY 2015: £8.6m); adjusted PBT £8.3m +2.5% YoY (FY 2015: £8.1m). FY 2016 consensus was for revenues of £487.7m and an adjusted PBT of £7.9m.
• Feeds Division: Operating profit £2.1m, +16.7% YoY (FY 2015: £1.8m); Fuels Division: Operating profit £3.9m, -9.3% YoY (FY 2015: £4.3m); Food Division: Operating profit £2.7m, +8.0% YoY (FY 2015: £2.5m).
• Net debt at 31 May 2016: £9.9m (31 May 2015: £5.9m). FY 2016 consensus was £10.4m.
• Final dividend of 4.7p delivers a full year dividend of 5.7p, +5.6% YoY (FY 2015: 5.4p).
VSA Comment
Despite its trading update on 21 June 2016 stating results would be in-line with expectations, NWF has delivered an adjusted PBT slightly ahead of consensus, which is impressive given the tough underlying market, particularly in feeds and fuels. However, on a reported basis, we note the £1.6m exceptional charge due to business restructuring and acquisition costs.
In feeds, NWF’s underlying volumes decreased by 3.0% but this actually represented an increase in market share as overall UK ruminant feed production fell by 3.6% in NWF’s FY 2016 period (falling 3.9% in H1, 3.3% in H2). Including its recent acquisitions, New Breed (acquired June 2015, 45,000t+ of feed per annum) and Jim Peet Agriculture (acquired March 2016, 50,000t+ of feed per annum), NWF’s feed volumes increased by 2.0% overall.
The recent currency weakness due to Brexit has, as expected, made the import of certain feed input commodities, such soybean and rapemeal, more expensive. However, this will impact all UK feed manufacturers, resulting in higher customer pricing, rather than reduced margins.
NWF’s fuels division increased volumes by 12.9% to 474 million litres. Its average operating profit was 0.8p/litre, slightly below its 1p/litre target, due to a reduction in higher margin heating oil sales from the warm winter.
NWF’s food division was again the steady performer, with continued high utilisation capacity and additional distribution efficiencies delivering an improved result YoY.
NWF spent £10m development capital in FY 2016 (including £9.5m on three acquisitions – New Breed, Jim Peet, Staffordshire Fuels), alongside its normal £3.5m replacement capex spend, but delivered a net debt position at the end of the year of £9.9m, just £4.0m ahead of FY 2015. This demonstrates the attractiveness of the business model’s strong cash flow generation capability.
For FY 2017 NWF is guiding towards development capital spend of £4m (plus £4m normal replacement capex spend) to double the capacity of its recently acquired northern mills at Longtown near Carlisle and Aspatria near Wigton (the Jim Peet sites). These currently supply 50,000t across the North of England and South West Scotland. NWF is exiting the SC Feeds site with the majority of equipment being transferred to support this northern expansion, with some also moving to its Wardle headquarters as well.
NWF has seen its share price increase significantly in the last month (+18.6% since 6 July). With fellow UK agricultural input firm Wynnstay (WYN LN) also posting a c18% increase over the same period, we would attribute this to the tentative signs of recovery in the UK dairy sector, despite the uncertainty caused by the looming Brexit negotiations.
Despite the fact that we have heard that UK market feed volumes have fallen quite significantly in the last few months (c5-10%) (no DEFRA data available yet), the UK spot milk price is providing a more bullish indicator. It has significantly increased in recent weeks and some reports suggest it is now over 30p a litre.
However, we would caution that processor contract prices have not yet increased in-line with this apparently more bullish outlook. The average contracted price fell under 20p a litre in June (last available DEFRA data). However, with UK milk production in June falling by 7.2% YoY with YTD production now 1.6% behind YoY, UK milk prices look likely to increase in the near future, providing some welcome relief to under pressure UK farmers, which should benefit the whole UK agricultural inputs sector as well.