SMALL CAP IDEAS: Why investor patience could be rewarded by Wincanton

Supply chain specialist Wincanton has charted a course that is expected to lead to material expansion in the coming years.

The FTSE-listed logistics company is already a provider of mission-critical services to a wide range of retail chains, consumer goods companies and government agencies and has identified several new growth drivers.

From an investment perspective, a little patience may be required, but a recently expanded contract with Wickes is a good example of why the wait can be worth it.

Some 342 employees will move to Wincanton as part of a new four-year contract, where it will take over the chain’s entire UK supply chain for kitchens and bathrooms.

It adds to an already impressive list of contracts and clients.

Major supermarket clients include Kraft-Heinz, Sainsbury’s, Morrison, Co-op and Waitrose, while in the general retail space it partners with Kingfisher on its B&Q and Screwfix chains, Primark, Halfords and Dunnes.

For both segments, in the words of CEO James Wroath, “In the simplest terms, we store stuff for customers and move stuff.”

That means that Wincanton either manages the warehouse or carries out the transportation operations owned by the retailer — sometimes sharing both — essentially providing a management service for the products that go to the customer’s physical stores.

The third branch is eFulfilment, which is again retail, but focuses on direct online sales by retailers, with Wincanton providing the warehouses, equipment and workers – typically for two-man deliveries of items such as furniture from Ikea, Marks and Spencer , Loaf, The White Company and DFS.

Fourth and certainly not least is Public & Industrial.

This one is completely different from the rest. Besides eFulfilment, Public & industrial is another important growth market for us,’ says Wroath.

‘We provide chain services to companies in the infrastructure, construction and industry sectors and also work for the government on a series of contracts for various ministries and agencies.

“These contracts are typically a closed book and we have made good progress here over the past few years.

“The sector focus is different from our other three markets, so in many ways this diversifies our client portfolio and gives us more balance, strengthening our resilience to any changes in market conditions.”

Public side clients include HMRC and the ministries of health, environment and transport (DHSC, Defra and DfT, if you like acronyms), as well as construction projects such as for EDF at Hinkley Point C.

For Wincanton, it uses the same logistical skills whether managing warehouses, yards or internal border clearance centers for the government to manage import and export flows.

But working with EDF is a relatively new concept to the industry.

“We have a consolidation center, so the mechanical, electrical and heating equipment is not delivered directly to site, but stops at our consolidation center to enable a just-in-time model for the construction team,” explains Wroath.

It is reported that one or two additional major government contracts will be put out to tender this year.

Unlike such large contracts, the opportunity for eFulfilment lies in much smaller wins via the 2021 acquisition of specialist Cygnia and the increased use of autonomous mobile robots (AMR) in shared warehouses for small and medium-sized customers.

For example, during the Christmas peak period, pick rates at Wincanton’s Cygnia location increased by an average of 200% year-over-year for brands such as Huda Beauty, thanks to the new AMR technology used to support picking activity.

“We believe the world of warehousing is going to make an incremental change when it comes to robotics and automation and we are committed to making sure we are at the forefront of that,” said Wroath.

“Robot automation isn’t wiping out the people in the warehouse picking process, but the value creation on the productivity improvements at the levels we know are possible is exciting from an investment perspective.”

Accelerating robotics offerings will require investment, but there’s another new and potentially very positive kicker coming up – though it’s one that management will have to keep tight-lipped for another week or two: the upcoming three-year valuation of the pension fund, which is expected in March.

However, analysts may speculate and suggest that the result will be that the company will have to make much lower cash payments to the pension fund.

In a recent note, HSBC analysts predicted “materially lower” contributions, “which would increase capital for reinvestment in the company,” while Liberum said lower payments were “increasingly likely.”

If they are right, it would allow more investment in warehouse automation and robotics, perhaps through additional acquisitions as well, and potentially enable better shareholder returns.

The existing business has an annual turnover of £1.5 billion, with all units growing sales in the first half of the year.

Earnings and cash flow also increased, despite the increase in investments and the challenging environment for all consumer-facing sectors.

HSBC and Liberum expect earnings per share of 41.4p and 41.5p respectively for the full year, with dividends above 13p, giving the 299p shares a dividend yield of 4.5%.

Both brokers have a target price of 500p, based on pension valuation progress, also add eFulfilment/robotics potential and this certainly looks worth keeping an eye on.