Thursday, February 3, 2011

RWD.L - discussion

RWD (Robert Wiseman Dairies) has had some intelligent discussion on Interactive Investor during the last week. 

"yorkists" wrote:
i've been sat here wondering why i bought this recently, drawn to the recovery potential - call that value if you will, well covered yield, particularly the very low debt (faced with a rising rate scenario that will ruin many companies), new distribution centre must mean they're as efficient as it gets in the UK, the fact that food inflation is going to increase costs to dairy farmers and this must at some point enable RWD and others to pass on costs to supermarkets, unlike here in Spain you drink fresh milk so at least that's one thing the Chinese can't send over, this is being priced almost as a play on the oil/derivatives price, but everything goes in cycles, i must admit i cannot see a lot of upside for a while and they don't strike me as an acquisition target, with the low debt and cost of new centre out of the way the yield should be safe, so a good income stoock though, i hope

"sailing high" responded:

Couldn't agree more.
Back in 2007 when the UK dairy industry was last in this position (dramatic rises in costs), the supermarkets held back price rises until situation was desparate, when all at once (and the good old Womens Institute were ultimately responsible for driving forward the issue).
When the bubble burst prices to farmers went up 20% to cover the cost of production. We are in a similar situation now with costs having risen by 20%. Set to climb another 10% in April.
Supermarkets still doing BOGOFS and price wars, processors like Wiseman, Arla and Dairy Crest all trying to put prices up but have no money coming in from their customers, so very limited.
History will repeat itself and the chain will suddenly jump.

Key difference betwen now and then is commoodity market for cheese, butter (especially) and milk powder is very very buoyant. returns from that market outstripping the liquid milk market which is the first time since the 1920's.

Hold on to stock. Dividends with RWD always good and they will come through within next 2 -3 months.

A quick rundown on RWD:
mkt cap: £233m
share price: 330p
Yield: 5.5%
PER: 8
ROE: 21%
ROE10: 17% (median ROE over last 10 years)
dividend cover: 2.14
interest cover: 44
LIAB/NI: 2.7  years =(55.5+40.9)/35.7 : long term liabs + net current liabs over net income

RWD ticks a number of value boxes: it has a good yield, a low PER, high ROE, adequately covered dividend, and low debt. EPS looks a little overinflated, and is forecast to drop 20% in 2011, and a further 19% in 2012. The forecast EPS for 2012 is 29.86, giving it a forward PER for that year of 11 - not too bad, providing the business doesn't decline further from expectations.

If you believe the dividend is sustainable, then RWD looks a good bet. The negatives appear to be that RWD supplies the big supermarkets, which are having a price war on milk. Costs at the farm gate are going up, so RWD seems to be squeezed at both ends. ... the worst situation to be in.

Some recent news:

02-Feb-2011: "69 jobs go in Okehampton with the closure announced last week of Robert Wiseman Dairies. " Source I am not too concerned about this, though, as RWD announced in a recent IMS that "The completion of the third and final phase of capacity at Bridgwater". RWD appear to be increasing their capacity, so the Okehampton thing appears to be to increase efficiency, rather than a scaling back of operations.

01-Feb-2011: "Robert Wiseman Dairies has become the latest milk processor to increase its price for farmer suppliers. From 1 March, it will raise the farmgate price by 1p/litre to 25.72p/litre. A statement said the move was in line with the company’s commitment to address concerns among farmers over the rising cost of milk production." A 1 ppl rise corresponds to an increase of about 4%, which appears to be in line with inflation.

At Tescos pricecheck , I see that Wiseman Fresh N Lo Milk Vff 250ml is selling at 29p. Asda are selling it at 31p. The prices are as at 26 Jan 2011. It will be interesting to see what happens to prices in future.

27-Jan-2011: Some highlights from the IMS:
we continue to anticipate that profits delivered for the year will be consistent with previous guidance. ... The Company's performance over the recent period of severe Winter weather throughout Great Britain has drawn positive feedback from across our customer base  ... we successfully fulfilled increased demand from customers. ... The completion of the third and final phase of capacity at Bridgwater has been beneficial in meeting customer requirements through the difficult weather conditions.  Utilisation of the additional capacity has resulted in throughput peaking in recent weeks, on an annualised basis, in excess of 450 million litres and allowed an easing in volumes processed at other dairies, as well as a reduction in the level of overtime worked. ... Bulk cream prices have been stable in recent weeks with average cream revenues for the year remaining higher than last year.  As previously reported, these additional revenues have been absorbed by increased costs, an increase in the amount paid for raw milk supplies and margin pressures in an intensely competitive market. ... We have ... commenced work on the expansion of our milk reload depot at Market Drayton ... this will assist with the expansion of the Wiseman Milk Group  ... The recent rises in oil related costs are significant.  Current costs for diesel and High Density Polyethylene (used in plastic bottles) are 10% higher than those incurred in September 2010  ... if sustained, have the potential to materially impact costs going forward.  ... We remain confident about our future prospects

15-Jan-2011: Herald Scotland reports: 
Price war is killing industry, warn dairy farmers ... Dairy farmers are now paid just 24.72p for every litre bought by Wiseman, despite production costs running above 27p a litre. ... Mr Smith said the problem was industry-wide, but that Wiseman – founded in East Kilbride and now one of the UK’s largest milk processing firms – risked losing its suppliers if it did not increase its price. ... However, that is unlikely, as the four leading supermarkets are locked in a price war, with milk often sold as a loss leader.

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