The Week Ahead (20-24 January): WYN, BRBY

News flow has picked up in the UK this week which, combined with some positive economic announcements, has prompted some cautious optimism in the equity markets.

On Wednesday we heard that inflation figures for December weren’t as bad as many had feared, falling to 2.5% (from 2.6% in November). This was followed by lower than expected inflation data in the US, which may have opened the door to a quicker cut to base rates. The Bank of England will make its next decision on 6 February and traders are currently forecasting an 80% chance of a 0.25 point cut to the rate, which currently stands at 4.75%

The inflation data has sparked a rally in the price of bonds, providing some respite after a rough start to 2025. The yield on 10-year gilts fell to 4.73% on Wednesday, their best day since 2023.

The FTSE has rallied slightly in response - a welcome change after bond markets received the most positive inflows for the first few weeks of the year.

In company news, I must extend my congratulations to Graham, Roland and Mark who have done a remarkable job this week summarising all the trading statements and company updates. You can catch up on all of their analysis via this blog.

There are a few stories which caught my eye:

• IG’s £160m acquisition of Freetrade. Graham likes IG as an investment and I like it as a customer, but I am non-plussed by this acquisition. Freetrade has £2.5bn in assets under management, which is less than what IG’s customers held in cash in their portfolios at the last set of results. The average portfolio size is just £3,400 (which is too little to make money off) and each customer contributed an average of £38 in revenue last year which, as my Dad pointed out to me yesterday, is less than the local sweet shop makes from children who drop in on their way home from school.

• Frontier Developments which enjoyed a big share price leap after instilling some confidence in this week’s trading statement. I covered FDEV in the last week ahead. It’s had a torrid time in the last few years, despite its strong product offering. But in the first four weeks of the 2025 financial year, the company has managed to deliver 22% of its forecast first half profit, which leaves management positive that it will return to a profitable position. Roland covered the company in more detail here.

The Week Ahead: 20-24 January

Onto next week, starting with the economic calendar.

Economic Calendar

Companies Reporting

Wynnstay (LON:WYN)

The farming industry often captures headlines because of how tough it is. I felt for the farmers attempting to keep their frozen fields alive last weekend, so they can turn what they are farming into some sort of product for which they will be paid highly regulated prices.

In the last few years, the cost of agricultural inputs (energy, feed and veterinary bills, for example) has risen above the price of outputs, making it almost impossible for farmers to make a profit.

Wynnstay, which provides feed and services to the British farming sector, felt the fallout from this miserable situation in 2024. In the first half, revenues were significantly lower than they were in the first half of 2023 and operating margins fell to a measly 1.2% (from a similarly measly 3% in the previous year). A combination of falling demand and falling prices means the company’s shares spent the latter part of 2024 in the downward part of their cycle.

Farming has been back in the headlines more recently for the impact that the Labour government’s new business and agricultural relief policy will have on the inheritance tax bill of family run farms. Around the time that farmers were campaigning in Westminster, Wynnstay was capturing its own headlines for warning on profits for FY2024. Poor weather meant that farmers chose to spend less on foodstuff.

But despite the negativity around farming headlines in recent months, agricultural commodity prices have actually started to pick up. Which perhaps helps to justify the fact that during its December profit warning, Wynnstay’s management said that the outlook for FY2025 was increasingly positive.

Management said that they would provide their full 2024 results and a 2025 update towards the end of January and it’s looking likely that we’ll be receiving that update next week. After an abysmal share price performance in 2024, which has left the company with a decent value profile, should investors be tempted?

Firstly, I would caution against the idea of trying to catch a falling knife. Wynnstay’s share price, earnings and forecasts are still all heading in the wrong direction. But then if next week does see another negative update, the company’s shares tend not to react too badly because it is so well asset backed. At the interim results, the net tangible asset value was £116m, which is equivalent to 174% of the company’s current market capitalisation.

The balance sheet strength helps protect the company’s dividend, which hasn’t been cut in over 20 years (even through periods of weak trading). The dividend yields 6.15% at current levels, which certainly makes this a promising candidate for income investors.

Burberry (LON:BRBY)

Burberry is another company which had a difficult 2024 after weak demand and poor financial management forced multiple profit warnings. At the start of the year consensus analyst forecasts were for adjusted EPS of 83p. Now they’re expecting the company to be loss making in the year to March 2025.

In the first half of the financial year, sales fell 22% to £1.1bn owing to weakness across all the regions Burberry operates in. Operating costs skyrocketed following large impairment charges and a painfully high inventory provision charge (reflecting the value of stock where the realisable value is believed to be less than the cost). Free cash outflows leapt to £184m. Net debt at £1.4bn (including £1.1bn of lease liabilities) rose to an uncomfortable 2.4x EBITDA.

To catch up ahead of next week’s trading update, you can read Roland’s detailed overview of the interim results here and his deep dive into the investment case here.

I have recently considered Burberry as a recovery/value play. Afterall, a new chief executive with a clear strategy can often be the trigger for a turnaround. The market seems to think there is reason for optimism. After falling from a peak of 2602p in mid-2023, the share price slumped to 575p in September (just before the interim results) and have since started a slow march back up again. In December, the share price crossed the 200 day moving average and it has remained just north of that technical indicator.

I am also encouraged by the fact that this is a luxury, heritage brand with over 150 years of history. The brand image has struggled a bit in recent years as it has attempted to penetrate new markets (like the leather goods market) and ended up having to sell items at major discounts. But the new CEO has a background in luxury goods and seems focused on stripping back the brand to the core where it thrives. A renewed focus on outerwear could end up providing the brand value the hike it needs to make this company an attractive takeover target.

The balance sheet is a bit of a mixture. On the one hand, the company currently sits on £430m of cash, £596m of inventories and £149m of trade receivables. Even if it was only able to sell its inventories at half of the cost on the balance sheet, that still gives at current asset value of just under £1bn. That might be quite attractive for a potential acquirer.

On the other hand, the company does have a worryingly high volume of lease liabilities - £1.1bn in total at the half year point, with £225m of those sitting in the current portion of the balance sheet. In the first half, the company took a £24m impairment against its store leases, which suggests the value of those assets has fallen. If many of those lease liabilities relate to stores that are unprofitable or struggling to grow, that’s a definite black mark for any potential acquirer.

Roland and Graham are both cautiously optimistic about the turnaround potential here and recent trends do seem to suggest there is reason for that optimism.