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.

 

Source: Datastream/Refinitiv

David Clark (david@saracenfundmanagers.com)

Alasdair Birch (alasdair@saracenfundmangers.com)

 

Important Information: The views and opinions contained herein are those of the author’s and may not necessarily represent views expressed or reflected in other Saracen Fund Managers Ltd communications, strategies or funds. This material is an opinion piece and intended to be for information purposes only. This material is not intended as promotional material in any respect. The material is not intended as an offer or solicitation for the purchase or sale of any financial instrument. The material is not intended to provide and should not be relied on for accounting, legal or tax advice, or investment recommendations. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Past performance is not a guide to future performance and may not be repeated. The value of investments and the income from them may go down as well as up and investors may not get back the amounts originally invested. All investments involve risks including the risk of possible loss of principal. Information herein is believed to be reliable but Saracen Fund Managers Ltd does not warrant its completeness or accuracy. Reliance should not be placed on the views and information in this document when taking individual investment and/or strategic decisions. Some information quoted was obtained from external sources we consider to be reliable. No responsibility can be accepted for errors of fact obtained from third parties, and this data may change with market conditions. This does not exclude any duty or liability that Saracen Fund Managers Ltd has to its customers under any regulatory system. The data provider and issuer of the document shall have no liability in connection with the third-party data. The Prospectus and/or saracenfundmanagers.com contains additional disclaimers which apply to third party data. Regions/sectors shown for illustrative purposes only and should not be viewed as a recommendation to buy/sell. The opinions in this document include some forecasted views. We believe we are basing our expectations and beliefs on reasonable assumptions within the bounds of what we currently know. However, there is no guarantee than any forecasts or opinions will be realised. These views and opinions may change.

Saracen Fund Managers Limited is Authorised and Regulated by the Financial Conduct Authority.

BACK