Buy Wynnstay (WYN) at 258.5p

An exclusive tip from Scarlett Moore of Sharecrazy's Premium Service

Wynnstay is a manufacturer, supplier and retailer of agricultural products. Having its origins in a farmers' co-operative, which was founded in Wales in 1918, the company had grown steadily over the years, and especially so in the past two decades following a number of acquisitions. The firm currently operates via two divisions.

In Agriculture, Wynnstay carries out two main activities. Firstly, the production and supply of blended and compound animal feed, which it sells to mainly cattle, sheep and poultry farmers. These products are manufactured from two wholly owned mills and from additional capacity obtained via a number of contract arrangements with third parties. Secondly, the division supplies products such fertiliser, agrochemicals and seeds to arable and grassland farmers. Supporting these two main activities is Glasson Group. Acquired by Wynnstay in August 2006 Glasson is acts as a shipper and trader of raw materials for the animal feed industry.

Wynnstay's Retail division is the smaller of the two, it making up just over a quarter of total group income in the first six months of the current financial year. Within the division the Country Store chain, which is mainly located in North Wales and in the Welsh border counties, offer a range of products to the professional farmer and country dweller, such as fishing and shooting equipment, pet food and animal healthcare products. In June 2007 the company opened the first of a new retail offering, Just for Pets, which as the name suggests is a dedicated pet store.

Results for the half year to 30th April 2010 were solid, and even though revenues grew by just 2% to GBP 120.3 million, a 180 basis points improvement in gross margins, coupled with lower interest payments on falling net debt, helped the firm deliver a 12% increase in pre-tax profits to GBP 3.6 million. Earnings per share rose by 8.7% to 17.7p and the interim dividend was raised by 9% to 2.4p.

At the year-end the balance sheet remained strong, with net current assets of GBP 16.4 million and net borrowings that at GBP 10.5 million were 24% lower than the previous half-year end. Furthermore, net debt is expected to decline further to the year-end as working capital outflows ease.

The Retail operations put in a strong performance over the six months, achieving a 27% increase in revenues to GBP 32.5 million. Growth was driven by contributions from new Just for Pets outlets and increased contributions from its now wholly-owned Young's Animal Feed business. However, the Agricultural supplies division experienced a 4.7% fall in revenues to GBP 87.7 million as unfavourable fertiliser prices hit sales.

Post period-end the business announced the acquisition of Woodheads Seeds Ltd in a deal which doubled the group's seed processing capacity and enabled it expand into a new geographical region. The deal was completed at an attractive historic multiple of 4.6, with a placing raising GBP 4 million arranged in order to support the deal.

Commenting on its future plans the group intends to continue adding to its network of retail outlets. Another pet store is set to be opened in the current calendar year with more planned in 2011. Wynnstay also hopes to add further Country Stores in areas where it already has a presence.

A key driver for trading within the group's core Agricultural Supply division is fertiliser prices. A spike in prices had a harsh effect on fertiliser demand in preceding years but with prices now stabilising and Wynnstay expecting a return to historical patterns of demand, trading prospects for the division are looking more certain. Established retail outlets are trading well and the business has dramatically boosted its presence in seed processing too.

Wynnstay's joint-broker Shore Capital expects earnings of 26.6p for the current year, putting the firm on a current rating of 9.7, with the shares yielding 2.8% if as expected a 7.3p dividend is paid. The following year the multiple falls to 9.1 on estimates of 28.5p of earnings. In light of the group's strong track record of integrating acquisitions and growth prospects across its operations I rate the shares as a BUY.

Key Data
EPIC: WYN
Market: AIM
Spread: 255p - 262p (2.67%)

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