Robert Wiseman Dairies: Profits to be Milked?

Robert Wiseman Dairies (LON:RWD) processes and distributes milk and associated products (like cream). It supplies store-brand milk to supermarkets as well as milk under its own label in its distinctive packaging. It delivers over 30% of the fresh milk consumed in Britain, every day. The company was established in 1947, starting out from a milk run at the family farm in East Kilbride.

Annual Results

Today (17 May), RWD reported results for the 52 weeks ending 2 April 2011. The market clearly didn't like the results, as the shares plunged over 3% today on their announcement, although I don't think there were too much in there that I didn't expect. The good news is that turnover increased by 3.5%, but the bad news is that operating profits decreased by 30%.

The company is being squeezed from both ends: by their customers (the supermarkets), and their suppliers (the farmers, and other input costs). On the demand side, milk is often a loss-leader for supermarkets, who use its price to lure in shoppers. There has been intense competition amongst supermarkets in the last year, so it is natural that RWD is caught in the crossfiire. On the input side, prices of feed has increased, and farmers are of course looking to pass this cost on to RWD. RWD has also said that the price of petrol is hurts them, as this increases the costs of producing containers for the milk.

Here are some highlights for the year:

• Net debt reduced by £16.2, to £4.9m. The company has always had a strong balance sheet, and interest cover is at a very high 36X.
• Bridgewater facility has been completed, and has a capacity to 500 million litres per annum. RWD can now distribute over 2 billion litres of milk per annum. The company believes that the facility is critical to the volume growth and improved efficiencies in recent years
• Expansion of Market Drayton milk reload depot expected to be completed in 2011
• Closure of some smaller depots as part of cost savings
• Increasing input costs necessitated a renegotiation of contracts with the supermarkets. The bugbear with this is that oil-related costs have continued to rise even after the contracts were revised. 
• RWD is the lowest cost operator in the sector, and continues to target cost reductions, for example by investing in transport planning software
• Dividend is maintained

A look at valuation

Whilst a reduction in operating profits by 30% sounds scary, it should be remembered that y/e Apr 2010 was a particularly strong year for RWD. PBT (Profits Before Tax) has averaged £35m over the last five years, which coincides with the PBT that was achieved in the year just ended. Analysts have penciled in PTB forecasts for next year of £27m, and for the year after of £29m. Financing costs look to be about £1m pa, so let's say that RWD has an EBIT "power" of £30m. Hopefully, this will prove to be a conservative figure, given that the average over the last five years is higher. At a share price of 324.1p, RWD has a market cap of £229.4m and net debt of £4.9m, giving it an EV of £234m. This gives RWD an EBIT/EV of 13% (30/234), which is quite a good rate of return.

RWD's ROC (Return On Capitial) comes out at 15% according to my reckoning (but you should always be suspicious of my calculations). I am calculating ROC in the manner suggested by Greenblatt, being EBIT over capital. Here capital is £195m, being net working capital (£-41m) + tangible fixed assets (£236m). Net working captial should be net of "excess cash", but cash is low in relation to turnover, so I figure that net working capital is simply equivalent to net current assets. 30/195 gives 15%.

A company on an earnings yield of 13% and a ROC of 15% looks relatively attractive to me.

RWD has managed to increase its EPS at a rate of about 10% pa over the last decade. If you include analyst estimates in the calculation, then that rate drops to about 6%. A lot depends on how accurately you think  analyst estimates will work out. ROE over the last decade has averaged 17%, which is quite good. ROCE has averaged about 22%, as reported by SharelockHolmes. SharelockHolmes bases their ROCE only on tangible assets; although RWD's intangibles are only paltry amounts anyway.

So, it looks possible to get a 15% annual compounded return out of RWD, sorta; which of course wont give you a track record to rival Buffett, but on the other hand, is a higher return than you would expect from the market in an average year. Expectations reflect a lot of negativity surrounding consumer spending and commodity prices. If sentiment improves, then the share price will, hopefully, reflect a shift.