William Sinclair – growing on fertile ground

Bernard Burns, chief executive of William Sinclair Holdings (SNCL), a leading supplier of compost and other products to the UK’s fast-growing horticultural sector, is preparing for an exciting spring. The company, with 35 per cent UK ‘growing media’ sales through garden centres, is looking for potential acquisitions in the ‘prime composting’ field and elsewhere, as it celebrates a doubling of profits in its last financial year and braces itself for the all-important March-to-June sales season.

These months are when Lincoln-based Sinclair, which increased profits before tax and exceptional items 108 per cent to £2.5 million in the year to September, makes 70 per cent of its annual sales. The company, which recently opened a new distribution centre in the Midlands, is expecting a significant increase in sales and therefore needs to up the stocks it holds in readiness for this crucial period.

Analysts suggest that Sinclair, whose turnover gained a modest 4.5 per cent to £48.5 million in 2009-10 after a disappointing peat harvest, will accelerate sales growth this year, with a 15 per cent advance to £56 million. The company, whose brands include J. Arthur Bower’s, Silvaperl and New Horizon, has 85 per cent of the stocks it needs for this year in place already, according to Burns.

Meanwhile, AIM-quoted Sinclair is also in the midst of fundamental changes that could strengthen its long-term position in a rapidly changing business. As Burns points out, the company’s underlying markets are expanding rapidly, with the gardening sector benefiting from reduced personal disposable income and an ageing population.

Environmental concerns and possible legislative changes are presenting Sinclair with a challenge that it is making strides to turn to its own advantage. Peat is a key traditional ingredient in compost, and Sinclair aims to become Britain’s most efficient producer of compost and other ‘growing media’ derived from peat or peat substitutes.

But peat, which in the fullness of an exceedingly long time becomes coal, is viewed as a CO2-emitting fossil fuel by the climate change community. The inter-governmental Kyoto and Cancun Agreements envisage hefty – and some would say unachievable – reductions in CO2 emissions over the years ahead. That means phasing out peat, and the present UK target date for its elimination is 2020.

Sinclair, whose customers include The Garden Centre Group (formerly Wyevale), Wilkinson, Homebase and B&Q, as well as numerous independent garden centres, has reacted to this challenge in two ways. Firstly, the company has been negotiating a hefty compensation deal with Natural England, part of the Department for Environment, Food and Rural Affairs, for agreeing to cease peat harvesting at its Bolton Fell property in Cumbria.

Sinclair submitted a claim in October and has so far received £9 million as a pre-payment, which will come in handy for acquisitions and internal development. The company is hoping to secure ‘substantially more’ when the final sum comes in.

Secondly, Sinclair has been developing peat substitutes, in particular ‘Super Fyba’, which is made from recycled garden clippings and other waste. Burns says the company has invested between £2 million and £3 million so far in developing this product.

Although Sinclair’s peat-free compost, New Horizon, pushed up sales 39 per cent last year (against a 23 per cent growth in the overall peat-free market), for most purposes, Burns insists that ‘nothing as yet can replace peat’. But he maintains that Super Fyba has properties closer to peat than any other high-volume alternative and has been ‘well received by customers and environmentalists’.

Strategy
However much cash Sinclair finally receives from the government, the money will clearly help the company in the measures it is taking to turn what Burns calls the ‘demonisation of peat’ from a threat into an opportunity. At present, the phasing out of peat is proceeding by voluntary agreement, including Sinclair’s deal with Natural England, but the company wants to put itself in a potentially winning position if the government moves to ban it by law.

Super Fyba, which Sinclair’s Freeland Horticulture topsoil subsidiary developed internally as Sincro-Boost Plus, boasts many of the features that make peat so useful to gardeners: good water retention, low nutrient level, nitrogen stability and lightness in weight. The product resembles peat in appearance and is made from renewable ‘civic amenity green waste’.

Burns points to big waste users and recycling groups, such as Veolia and WRG, as generating ‘massive amounts of material with no home’. Sinclair can use this for Super Fyba.

Since most of the four million tonnes of civic amenity and green waste material comes from urban areas, which is where many of the gardeners wanting compost live, transport costs should be significantly lower than potential competition based in outlying peat-growing areas such as Ireland. This could be important, with transport a key cost in this business, accounting for some 20 per cent of total costs.

Demand for Super Fyba is already outstripping production from a 12-acre facility in Basingstoke, leased from French utility Veolia, the world’s second-largest waste management company, and Sinclair is to commission a second plant in Lincoln within 12 months. While developing Super Fyba as a mainstay for a peat-free future, Sinclair is pursuing parallel growth ploys.

An innovative peat-drying business is one of them and acquisitions are another. Sinclair, which ended its last financial year with £3.6 million cash, is on the lookout for takeover targets.

The company spent £1.1 million in November buying the business of pest control and weed killer specialist Growing Success Organics and an aggregates concern and is looking for more deals, which, Burns insists, will not require any fresh funding. Market gossip suggests a potential move to buy a division from US group Scotts, a major player in this market, and Burns agrees that parts of that business ‘would be of interest to us’, while the early success of Super Fyba ‘has resulted in a plan to become a prime composter’, as well as a supplier.

Management
Life at William Sinclair has in the past not been without its upheavals. Chairman Bill Simpson, former boss of successful and tightly run furniture group Silentnight, joined the company six years ago during a period of change initially triggered by the discovery of a previous accounting irregularity.

With him came his colleague Burns, who had been managing director of Silentnight Beds, that group’s largest and most profitable subsidiary. Burns, with a background in consumer durables, is finding running Sinclair a stimulating experience.

Ken Piggott, a former managing director of Boots and one-time head of DIY company Do-It-All, brings some pertinent experience to William Sinclair.

Fellow non-executive Philip Nuttall brings valuable transport know-how as a former finance director of Exel Logistics’ European division and ex-head of the Autologic transport services group.

Prospects
Simpson, Burns and their team sound confident that Sinclair’s strategy, in particular the launch of Super Fyba and the continuing acquisitions policy, will put the company in a stronger position. Not only has Super Fyba had an encouraging reception, but also the peat drying business has made a strong start.

Weather has always had an important influence on the company’s fortunes, since winter wetness prevents peat being dug at that time and so compels the annual frenzy ahead of Easter, when companies start buying compost and other materials. The introduction of a peat substitute should mitigate that, while peat drying should extend the peat-harvesting season and reduce the company’s acute seasonality.

Profit margins have in the past been disappointing, but the picture seems to be improving on this front. Operating margins rose from 4 per cent to 6 per cent in 2009-10, the highest level for more than five years.

Burns stresses that Sinclair is working to improve operating efficiency and the market expects further modest margin improvements this year, helped by a more efficient use of transport. Analysts see the company lifting pre-tax profits 20 per cent to £3 million in the current financial year, with a further 33 per cent gain to around £4 million in 2011-12.

New acquisitions could also have a positive impact. Sinclair, which has eliminated net debt and boasted year-end cash of £1.8 million, is clear that it sees further useful opportunities in the offing.    

Valuation
While Burns and his colleagues scan the field for takeover targets, it is more than likely that other companies are or will soon be casting their acquisitive eyes in Sinclair’s direction. As a market leader grasping the nettle of change in what is seen as a long-term growth market, the company, whose largest institutional shareholder, Gartmore, has little more than 8 per cent, has all the attributes of an attractive bid target.  

A prospective price-to-earnings ratio of 12.9 hardly looks excessive in the circumstances. On the assets front, a stated net asset value of 90p a share may not look all that tempting, against a share price that has already surged from a 97p year’s low to 173.5p, helped by assiduous presentations around the City, but the 90p makes no allowance for a second tranche of Bolton Fell compensation, unharvested peat deposits or the potential development value of the head office in Lincoln.

Investors have been worried about Sinclair’s defined-benefit pension fund deficit, which more than doubled to £9.5 million in 2008-09 and rose by another £140,000 last year. The company has agreed a ten-year reduction plan with the fund’s trustees and the Pensions Regulator and is undergoing a three-year revaluation programme, while Burns notes that a rise in interest rates would ease the position, as, clearly, would a strong stock market.

Another factor in Sinclair’s favour, while interest rates remain low, is its progressive dividend policy. Last year, the company paid out 5p a share, up 50 per cent and covered by earnings of 12.2p a share, and Burns says the company believes in ‘the need to show a progression in dividends’.

All this leaves William Sinclair at 173.5p on a prospective price-to-earnings ratio of 12.9 and a yield of 3 per cent. Despite the shares’ recent strength, that leaves scope for future profits.