Normally it’s management who complain bitterly that the market doesn’t understand their business and their shares should be valued far more highly. In Wincanton’s case, it’s one of the investors.
Gatemore Capital Management, which has a stake, is agitating for the group to split its two divisions, use some of the proceeds to extinguish the pensions deficit and, in the process, unlock value. The activist reckons a break-up could give the shares, which closed at 259p, a value of more like 425p.
Wincanton is Britain’s biggest logistics group, employing 17,700 people on more than 200 sites and operating a fleet of 3,600 vehicles.
Its two divisions are retail and consumer, which tends to deliver smaller items and whose customers include Ikea, Argos and Marks & Spencer; and industrial and transport, which delivers larger goods, including containers, and works for companies from Breedon and Tarmac to BAE Systems.
Wincanton’s shares are included in the FTSE All-Share index. If you’d bought them ten years ago, your holding would be worth 13 per cent less now than it was then; if you’d bought the index, you’d be looking at a gain of about 49 per cent.
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Gatemore’s argument seems pretty clear. Wincanton operates in a hot sector, where companies contract out delivery and ecommerce means there is ever more of it to do. Yet it suffers from a “conglomerate discount” — investors tend to value businesses that consist of several diverse units more lowly than simpler companies. On top, its pensions deficit, while falling, has been volatile and has been a financial headache for management and shareholders that needs to go.
The argument is that there is no logical reason for the two sides to be together. Retail and consumer tends to operate through “open book” contracts, where it is open with customers about costs and both sides come to an agreement about the fee it takes for delivering goods. Lower margin work but also lower risk.
The industrial and transport unit operates on “closed book” contracts, where Wincanton pitches for a bigger logistics contract, under which it has to bear much of the costs but is able to charge more.
Splitting them would create leaner, simpler and more valuable businesses, the argument goes.
There seems to be merit in Gatemore’s argument. As an investor, it is no slouch, and knows its way around the sector thanks to its successful campaign to overhaul DX Group, where it has a stake of 35.6 per cent. Yet there are drawbacks to its argument. While Wincanton’s two divisions may not be complementary, there are benefits in owning both.
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As pointed out by Liberum, the retail sector is seasonal, and Wincanton is able to divert drivers and vehicles from the industrial division in periods of high demand, such as Christmas. While it uses different warehouses for storing goods, the scale of a bigger network also gives Wincanton greater flexibility to manage resources.
Splitting the divisions, unless they were sold, would incur costs that would erase some of the value gained. Nor is it clear what would happen to the pension liabilities.
That said, Wincanton’s apparent refusal to engage with Gatemore’s argument appears confusing. It would make sense, and not cost much, to at least explore the idea of a separation before ruling it out.
What seems clear is that Wincanton has bags of potential in a logistics sector that is on the up. With its shares trading on a highly undemanding multiple of just over ten times earnings, it is also clearly undervalued. As a further attraction, its shares offer a yield of about 3.8 per cent. Worth a much closer look.
ADVICE Buy
WHY The shares are cheap and the company has plenty of potential
Plus 500
As many learnt to their cost during the Californian gold rush, it would with hindsight have been better to have set up a business selling the gold hunters picks and shovels than attempting to stake a claim on a piece of land no more likely to contain any of the precious metal than a pair of Ratners earrings (Harry Wilson writes).
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Cryptocurrencies, such as bitcoin, have been described as the new gold and much like the miners of the 1840s and 1850s, while there have been some big winners, most have struggled to make much money from their claims, something not helped by the 70 per cent drop in the price of tokens from their December highs.
Plus 500 has not sought to become a “miner” of cryptocurrencies, but the spread-betting company has benefited from the upsurge of investor interest in trading virtual currencies. As a trading company, it is agnostic on whether the cryptos are going up or down; so long as people are betting on their moves it will make its commissions.
Last month Plus 500 issued a profit upgrade referencing the boost it had got from cryptocurrency trading and yesterday it published a second pointing to its success in diversifying its revenues streams.
While other spread-betters have been more cautious, Plus 500’s all-out move into the new market for now appears to have only brought upside and, as the falls in the value of bitcoin have shown, it has also avoided being hit by the downside.
Also fuelling the business is President Trump’s nascent trade war. Threats of tariffs against everyone from China and the European Union to Canada and Mexico have provided a healthy dollop of volatility for financial markets, benefiting spread-betting businesses, which do best when their day-trader clients can see opportunities for quick returns. Looking further out, regulation is the main cloud on the horizon for the industry, but as operators such as Plus 500 look to lock down more sophisticated customers the impact on their businesses is receding.
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For now Plus 500 looks like a good buy for investors, though people should keep a close eye on European regulatory developments and any signs that the company is chasing the crypto craze a bit too hard.
ADVICE Buy
WHY Market volatility is a boon for the industry