UK Portfolio update – A new purchase : Wincanton
The days of free returns for consumers may be ending, the time for returns for UK logistics investors may be about to start.
The combination of Brexit and the recovery from COVID-19 have upended many UK industries, with new pressures such as staffing, energy and raw material shortages continuing to emerge. These are the kind of challenges that can prove the quality, or vulnerability, of companies and their management teams, as well as causing the reappraisal of public, government and equity market opinions. The notion that goods and services can always be delivered both cheaply and in a timely manner is one example of an assumption that has long been taken for granted. This went hand in hand with generally limited interest from investors in parts of the transportation market, often viewed as low margin, commoditised and generally unattractive.
Wincanton, despite being one of the leading and established UK-based contract logistics operators, is a good example of an opportunity we found that has been thrown up by recent events. Change has already been going on behind the scenes of its sector for some time, a result of ecommerce growth increasing both complexity and service requirements. The company also had a difficult past thanks to a mis-timed overdiversification and expansion into Europe, but the hard restructuring work has been done and is now paying off.
The rate of logistics outsourcing is estimated to be still at a level of only around 30% in North America and Europe, and around 50% in Wincanton’s end markets. This could be about to be pushed higher. As companies re-examine ballooning costs and encounter recurring shortages, there are great opportunities for new contracts and organic growth.
Now streamlined, Wincanton is also starting to reinvest into its home market and has just announced its first bolt-on acquisition for many years. Cygnia provides supply chain solutions to small but fast-growing consumer brands and will bring a new set of SME customers and market reach, while benefitting from Wincanton’s expertise in scaling up its infrastructure.
There are likely to be near-term challenges from sourcing labour and managing contract structures to preserve profitability, but this is a chance for Wincanton to show its competitive edge, maintain its record of high customer loyalty and gain market share. Longer term, there are also exciting prospects for both increased automation and more efficient energy and fleet technologies. As these will require both investment and new skills, we believe this could encourage greater asset sharing and again push outsourcing to the larger players.
Last but by no means least, what is the right price for a financially strong and high return specialist with the scope for growth well above GDP in a fragmented market? Certainly looking at the overall market we would come up with something higher than the 11x FY1 P/E at time of purchase, a number that we believe could remarkably fall to mid-single digits in five years and be accompanied by a double digit free cash flow yield. If the Cygnia deal goes well, we would expect further acquisitions to add even further to those figures. The days of free returns for consumers may be ending, the time for returns for UK logistics investors may be about to start.
David Clark (firstname.lastname@example.org)
Alasdair Birch (email@example.com)
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