When it comes to the realms of more consistently reliable companies on AIM, NWF Group is one stock that is perhaps worthy of closer scrutiny.
Whilst it may well appear less glamorous than others, it is nevertheless a sturdy and reliable performer, with steady growth prospects along with a progressive dividend policy that is currently yielding around 3.7%.
The company is well established too, with its roots going way back to the 1870’s but which today sees it as a major player across the UK in the markets it serves.
This sees it active across three distinct yet connected areas that include the supplying and distribution of animal feeds along with fuel and food distribution which collectively last year provided for full year revenue of £687m which delivered adjusted pre-tax profits of £12.8m and EPS of 20.9p.
In order to learn more about this business and its prospects, I caught up with CEO Richard Whiting yesterday following the release of NWF’s Interim Results.
This saw the company announcing what appear to be positive numbers given the Covid induced backdrop, with revenue of £309m delivering a pre-tax profit of £2.5m and EPS of 4.3p for the first six months of the year.
Whiting sounds a cautiously optimistic tone on the current prospects for the business where resilience appears to have been the key word in battling the recent headwinds that have impacted many.
Speaking firstly on the fuel division the CEO expands, “we operate some twenty five depots across the country where 75% of our business is to commercial customers and the remaining 25% is focused on domestic users, the market largely serving customers that do not have access to gas or are off grid”.
And this is no small operation, as the fleet is made up of a 150 tankers that typically operate in a radius of 30 miles from their depot.
However, despite standing as the UK’s number three player in the market, Whiting tells me it is a highly fragmented sector where the top ten players represent just 25% of the overall market and where there are more than 150 small players in operation.
That provides for further opportunities for NWF to acquire and bring others into the fold, a strategy that has proven successful, ongoing and looks set to continue in the years ahead.
For the period concerned, fuel volumes were up 4.8% on the comparative period which were assisted by previously made acquisitions. This saw profits for the division moving ahead to £1.9m from £1.4m with the sales mix seeing higher levels of gas and oil against reduced sales from diesel.
The period concerned runs to the end of November 2020, so it is perhaps reasonable to assume that with the current lockdown and continued home working coupled with more recent colder weather, then the fuel arm is perhaps in a decent spot at what is its traditionally busier period.
In terms of the acquisitions, Whiting adds, “we typically look at pay 6x EBITDA for a business we buy and that will be immediately earning enhancing providing us with a continued growth pattern. We have made five acquisitions in the last two years and we are looking at spending £10m per year on further purchases, with the targets having a good customer base and a mix that are largely operating off grid”.
The model certainly appears to be a good one and importantly - as part of the acquisition and growth processes - Whiting says that businesses which come into the fold retain their own identity and brand, with the added ingredients of being able to integrate a back office suite utilising centralised data in the form of performance and specific numbers.
Aside the fuel, NWF has its own food focused distribution arm that is concentrated on providing a service for both food importers and food manufacturers.
“We distribute all of our customers products direct from site, this sees us holding the stock and then delivering that to the likes of Tesco and Sainsbury as orders are taken.”
Within the operation NWF now boasts a new 140k sqft warehouse facility in Crewe that the CEO says will generate extra profitability moving forward and things there are going to plan.
Whilst food in general has been viewed as something of a safe haven by investors, the various issues around the pandemic has resulted in some volatility across this arm for NWF.
“Although these factors impacted our profits for the period, they should be one off and short term” said Whiting, as the business reported a reduction in profit of £0.5m from a previous £1.4m.
As an example of the volatility that played out the CEO adds that back in September of last year, certain Supermarkets doubled up their orders in a panic measure which came at extremely short notice.
Likewise, a couple of weeks later orders were halved, whilst in October there was huge demand for UHT milk as retail customers overbought on that and tea. Then, throw in the Brexit issue coming to the fore and it is easy to see that spikes and troughs have largely been the trend which has been a difficult period for NWF to navigate.
Regarding the post Brexit world Whiting says some customers are having issues with products stuck at ports, but that this doesn’t really impact NWF as it is not an importer, rather, it takes over the stock once it arrives in the UK.
Looking ahead, the hospitality areas that the company serves which has resided over a 10% decline should begin to recover moving forward, whilst the serving to supermarkets which has increased by the same figure should continue to prove positive.
The third aspect within the group is NWF’s animal feed operation and this sees it supplying its feed for cattle and sheep and which in turn sees some four thousand farmers served in the UK stretching from the west coast of Scotland down to Cornwall.
“As part of this operation, we operate three mills for production, all located on the west of the country being close to Carlisle, Chester and Barnstaple and these are backed up by our own nutrition operation”.
This appears to be a highly important aspect for ongoing support and growth, as Whiting explains “we have our own nutritionists who go to the dairy farms and assess anything from the genetics, to the grass quality and the herd in general. We can then then recommend the best diet and tailor that to provide ongoing support to the farmers going forward”.
Such is the value that NWF attributes to this area, that it is recruiting nine graduates a year from Agricultural College to be trained across the nutrition space in order to further deliver support and growth.
Profit for the division was similar to the prior period at £0.6m against £0.7m, but it is now well into the more historically important seasonal period where cattle are housed internally throughout the winter months which in turn sees a greater demand for feed.
Whiting is understandably proud of the business and what it has achieved which has seen it consistently delivering year-on-year and has an excellent dividend track record as part of that.
“We may be seen as a bit dull and boring” he says, “but we are also one of the most resilient of businesses where we generate cash, deliver profits and pay dividends. We are also ambitious though and want to continue to grow but within that we don’t want to over promise and under deliver”.
To that end, it may well be worth taking a closer look at NWF as a potential longer term investment play, where reliability and stability with the added ingredient of steady growth are key points.
At present broker Peel Hunt is forecasting full year revenue of £690m with EBITDA at £16.5m, providing for adjusted pre-tax profits of £10.7m giving EPS of 17.6p.
That sees the stock standing on a PER of 11 at the current price of £1.95p which values the business at £96m.
Looking ahead to next year the same broker anticipates profits moving to £11.3m with EPS up to 18.5p which puts the shares on a forward PER of little more than 10.
That looks decent value for such a solid, well run operation with growth prospects to boot that is also paying a dividend adequately covered at 2x earnings.