Agricultural products producer NWF Group (LSE: NWF) announced today that, thanks to a difficult first half, the company’s pre-tax profit for the six months to the end of November had fallen 23.1% on an adjusted basis.
Including one-off items, which in this case included a £3.7m loss on the company’s defined pension scheme, total income for the period fell from £2.1m in the year-ago period to -£2.1m. Fully diluted earnings per share slumped 27.6% to 2.1p, from 2.9p in the year-ago period.
In addition to NWF’s earnings collapse, the group also reported a near doubling of net debt from £10.4m to £19.1m. Net debt to earnings before interest, tax, depreciation and amortisation rose from 0.8x to 1.6x.
Top line growth
Despite earnings coming under pressure, NWF reported a 14% rise in revenues for the period. Revenues increased from £224.6m to £255.9m as all three of NWF’s feeds, food and fuels divisions registered growth. Growth was driven by contributions from acquisitions, higher activity levels, and by increased commodity prices in its feeds and fuels units.
However, low milk prices hit summer trading volumes in the group’s feeds division, while its fuels arm was bruised by a downturn in heating oil demand in the summer. Both of these uncontrollable factors dented margins.
The good new is that even though margins have come under pressure NWF’s management believes the company is still on track to hit full-year figures. For the full-year, City analysts have pencilled in earnings per share of 13.4p, down 2% year-on-year and revenues of £487m, up from £466m last year. For the fiscal year ending 31 May 2018 analysts are expecting the group to return to growth with earnings per share growth of 5% projected. Based on these estimates share in NWF are currently trading at a 2018 forward P/E of 12.4.
A warning to investors
While NWF has blamed the last half’s poor performance on factors out of its control, the figures send a worrying warning to investors. NWF is a low margin business and any unforeseen headwinds could have a significant impact on the company.
This year, NWF is on track to chalk up a pre-tax profit margin of 1.7% indicating that after tax the margin could be as low as 1.4%. With almost no margin for error, the company’s shares look expensive, as they currently trade at a forward P/E of 13.
On the other hand, NWF’s peer Anpario (LSE: ANP) looks more appropriately priced.
Animal feed producer Anpario’s growth has exploded in recent years. Pre-tax profit has risen 150% since 2012 and analysts are expecting further pre-tax profit growth of 25% by 2018. Investors have placed a premium on the company’s shares thanks to this growth outlook, but based on the expected growth going forward, shares in Anpario still look attractive.
City analysts have pencilled in earnings per share growth of around 10% per annum for the next few years. The shares currently trade at a forward P/E of 17.8 and unlike NWF, Anpario’s pre-tax margin is a healthy 17%.
The bottom line
NWF’s 30% profit slump shows that the company is not for the faint-hearted and the shares look expensive at current levels. As a result, peer Anpario may be a better buy.
