Last month, shares of haulier Wincanton tumbled after it was forced to suspend its dividend in order to conserve cash. This is because average pro forma net debt has risen to about £240m, representing about three times earnings before interest, tax, depreciation and amortisation (EBITDA). That is preventing the company from investing in its higher growth divisions. A good example is the provision of end-to-end logistics under long-term contracts for the likes of AgustaWestland, Saint Gobain, Best Buy, BAe Systems and the public sector.
The good news for shareholders is that the newly appointed chief executive, turn-around specialist Erin Born, has grabbed the company by the scruff of the neck. He is shaking it up by cutting costs, reducing gearing and concentrating on what the firm does best. On 9 June he announced the disposal of its ailing divisions in Germany, eastern and central Europe and Holland for €46.5m. The loss-making French business and food-service unit are also expected to be jettisoned over the next 12 to 18 months.
While this restructuring is under way, Wincanton has continued to secure new business. That includes prestigious deals with WHSmith, Wavin, BP Gas and Nestlé Purina in the last quarter. In June, it bagged the contract to transport 11 million litres of water to UK music events such as Glastonbury, the V Festival and the Notting Hill Carnival.
Wincanton (LSE: WIN)
Meanwhile, the firm’s Pullman Fleet Services division is going from strength to strength. It offers vehicle servicing in the rapidly expanding online shopping market. And it now maintains more than 80% of all home delivery vehicles in the UK on behalf of leading supermarkets, such as Tesco and Sainsbury’s. In 2010, Pullman took on 1,100 more vehicles for its customers, bringing the total managed fleet to nearly 3,500.
The City is forecasting 2011 revenues and underlying earnings per share of £1.9bn and 21p respectively. On this basis, I value the group on a six times EBITDA multiple. After adjusting for the £87m pension deficit (net of tax) and debt load, that delivers an intrinsic worth of about 185p a share.
Of course no stock is risk-free, and Wincation operates in a cut-throat industry where margins are notoriously slim. The debt reduction and turnaround plans may not achieve the desired results. And the firm is also exposed to the usual fluctuations in crude prices and bad debts. Like Halfords, Wincanton is expected to take a hit this year after Focus DIY went into administration. That said, these dangers are more than factored into the down-trodden share price, especially as the haulier could well become an acquisition target in a consolidating sector. The next trading update is scheduled for 21 July, and joint house broker Numis Securities has a price target of 180p.
Rating: SPECULATIVE BUY at 123p (market capitalisation £150m)