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My last two newsletters discussed the steady profitability of Wynnstay (LSE:WYN) through good times and hard times. When I recently bought at £3.405 I judged there to be a good margin of safety between its intrinsic value and what Mr Market was asking for it. Since then Wynnstay has reported good profits for the year to October 2020 in the face of the Brexit uncertainty, Covid restrictions and the recession. Also Simon Thompson, a writer for Investors Chronicle, has written positive things about the company. So the share has risen to £4.40. You will have to make your own judgement on whether the margin of safety is now sufficient.
(I’ve recently been approached to run a deep value mutual fund (an OEIC, supervised by the FCA, and open to all investors). A thought occurred to me regarding the gap between me buying Wynnstay and publishing a series of Newsletters about the company and the £1 rise in share price during that time. If I had been running the fund I would have invested other people’s money alongside mine at £3.405, or perhaps a little more given the larger sum to invest. Clearly, this is an argument for saying yes to becoming a fund manager. What do you guys think? Would anyone be interested in putting money into a fund where I had sole decision making power on investment selection? Investment management charges, by the way, would be 0.85% of assets under management.)
Wynnstay’s Piotroski Analysis
Profitability factors
If the firm is profitable and produces positive cash flow it has a capacity to generate funds internally. A positive earnings trend suggests an improvement in the firm’s ability to generate positive future cash flows.
- Does Wynnstay produce net income before extraordinary items? Yes, it is profitable (£5.53m)and so scores a point here
- Positive cash flow from operations before WC investment and capex? WYN has high cash flow (around £10m pa). A point scored.
- An increase in return on assets employed (net income before exceptional items divided by beginning of year total assets) in the business from the previous year?
2020: £5.5m/£165m = 3.3%
2019: £6.1m/£175m = 3.5%
No Piotroski point scored.
4. Cash flow (before WC investment) greater than profit (so profits are not driven primarily by positive accruals, which may be ‘managed’)? WYN scores a point here.
Leverage, liquidity, and source of funds
Measuring changes in capital structure (debt:equity ratio) and the firm’s ability to meet future debt service obligations.
- Has the firm’s long-term debt reduced relative to its total assets (averaged through the year)?
2020: £0m/£164m = 0
2019: £3.1m/£170m = 1.8
An improvement therefore another Piotroski point.
2.Has the firm’s current ratio (current assets divided by current liabilities) improved over the past year?
2020: £114m/£58m = 1.97
2019: £121m/£67m = 1.81
Respectable ratios in both years, and an improvement in 2020, therefore one more Piotroski point.
3. Has the firm avoided raising fresh equity capital (e.g. rights issue or placing) in the last year?
It has, so a point is gained here.
Operating efficiency
- Has the gross profit margin improved this year compared with last?
2020: £61m/£432m = 14.1%
2019: £62m/£491m = 12.6%
An improvement, therefore an………………To read more subscribe to my premium newsletter Deep Value Shares – click here http://newsletters.advfn.com/deepvalueshares/subscribe-1
