NWF Group

HOLD

13/08/2008 Oliver Haill

Having limped through a tough first half, four-legged former farmers’ co-operative NWF proposes to amputate a limb, its garden centres business, in order to reduce its high debt levels.

The north west-based group intends now to focus on its remaining distribution, fuels and animal feeds businesses. Excluding garden centres, which are now regarded as a ‘discontinued operation’, these remaining three drove sales forward 20.8% to £361.2m in the year to May but saw profits fall 27.6% to £4.2m due to the weak first half and significant investment in warehouse expansion.

Given that the economic outlook remains ‘uncertain’ due to the unpredictability of feed commodity prices and demand for fuels, NWF has become ever more concerned with its net debt levels, which stood at £52.1m at year end. The company has negotiated medium-term banking facilities ‘with significant headroom’ and house broker Charles Stanley expects the group will receive around £10m from the garden centres sale.

Chief executive Richard Whiting remains sanguine despite the uncertainties clouding the horizon, buoyed by the strong second half recovery. The distribution business is now at full capacity and 'has the potential to make over £2m-plus' of profit now, with management able to now negotiate with a stronger hand for higher margin business.

The fuels and feeds divisions have both been victims of turbulent raw materials prices, but with there being a shortage of milk produced in the UK, farmers will continue to expand their herds and their demand for feed. The fuels operation, says Whiting, profited despite the volatility of supply and demand and has now proved it can do so.

Charles Stanley has revised its current year forecasts, excluding garden centres, to profits of £4.7m, earnings of 6.7p per share and a dividend of 4.1p. Down by more than half since January the shares offer recovery potential but not for the risk averse. Hold.

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