Wincanton (BUY) – Update: trading in line, valuation remains attractive

WIN LN (252p, TP Under Review from 225p). Mkt. Cap £312m
Our view: WIN has issued a brief pre close update for the year ended 31 March stating that performance continues to be in line with expectations. Our forecasts for the full year are unchanged and indicate steady growth y-o-y. The company announced earlier this week a new five year contract with Britvic which adds to other recent wins and renewals. The stock has rallied strongly since the company reported solid interim results last November. That said, WIN remains good value and is defensively positioned for any Brexit-related slowdown. The stock is trading on a calendar 2017e PE of 9.7x or a 28% discount to the UK logistics sector. We forecast a dividend yield of 3.5%, 2.5x covered. Reiterate BUY but our target price is placed Under Review from 225p. 
Trading update – WIN has issued a brief pre close update for the year ended 31 March stating that performance continues to be in line with expectations as set out at the interim results. Our forecasts for the full year are unchanged and indicate steady growth. The company announced earlier this week a new five year contract with Britvic which adds to other recent wins and renewals. Full year results will be announced on 17 May, 2017. Speaking with the company, we understand that the pipeline of new business is healthy. Share price performance has been strong, up 27% in six months and 72% in the past year vs. the FTSE All-share up 6% and 19%, respectively.
Strong fundamentals, defensive – Around 60% of the company’s activity operate on a defensive “open-book” basis, mainly with UK household names and over multi-year (i.e. 3-5 years). WIN’s customers include many household names (e.g. Heinz, BAE Systems and Waitrose, ASDA). Competition in contract logistics is fairly limited with the only other larger competitors to WIN being DHL Supply Chain (Deutsche Post-DHL, DPW GR – NC) and XPO Logistics (XPO US – NC). Volume and cost risk within the company’s contracts is typically minor and capital requirements are limited. Group operating margins tend to be stable through-the-cycle. In addition, WIN has spent the past few years divesting non-core activities and fixing legacy pension liability issues. Free cash generation has improved and this has allowed the company to recently reinstate a dividend. Net debt/EBITDA (incl. pension deficit, Cantor calculation) is currently 2x vs. the sector average of 3x; interest cover is 3x.
Cantor forecasts and valuation – Our FY17 forecasts are for revenue of £1,147m, operating profit of £51m, diluted EPS 26p and DPS 8.8p. WIN is trading on a calendar 2017e PE of 9.7x. This is a 28% discount to the UK logistics sector. Our estimated full year dividend indicates a yield of 3.5%, 2.5x covered.
Risks and TP – Demand for third party logistics services in the UK and Ireland, contract pricing and driver cost & recruitment pressures, and pension payments. Our TP is calculated using a 10-year DCF of free cash flows. Due to strong recent performance of the stock we place our TP Under Review from 225p.
Other news: Clipper Logistics host site visit to Midlands DC – Yesterday Clipper Logistics (CLG LN – HOLD – TP U/R) hosted an informative site visit to one of its Northampton based e-fulfilment distribution centres. This multi-user site services John Lewis and other accounts, and hosts the Group’s new Clicklink operations. Call us for more details
We are watching DX (DX/ – NC) and Menzies (MNZS – NC) with interest !
Robin Byde
Managing Director, Equity Research Analyst, CA
Cantor Fitzgerald Europe, Equity Research (Level 20), One Churchill Place, Canary Wharf, LONDON E14 5RB
This research comment has been reviewed through CFE’s research review process and is consistent with our published opinion. Full disclosures are either contained within an attached document or available on request.
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