Robert Wiseman Dairies Share Discussion Threads

[muffinhead] 25/10/2011 02:56

No let up by ASDA

Asda's milk premium to farmers cut by 20%

[muffinhead] 22/10/2011 14:00

my concern is profit before tax £34.36 mill with cost of sales £728 mill (917 mill turnover) in final results 17/5/11

a further 4.85% increase in cost of sales only needed to wipe out profits on same turnover/operating expenses

Has there been a 4.85% increase in costs?
in H1 trading statement 29/9/11, payment to farmers up 1.85p/L from 1st October; diesel and plastic costs up 15%; no deal to increase price at retail side

[soi] 07/10/2011 08:51

Hi Bought in at 286.5, good yield at this price.
Maybe will drop lower but the floor shouldn`t be too low( I hope!)
All the Best

[muffinhead] 06/10/2011 15:31

£75 billion is a lot of dosh to print (£1100 for every man, woman and child)

BOE doesn't care as long as banks get liquidity

Unfortunately everyone else left chasing their tail as input costs go up and margins maintained level at best if you can get better pricing from your customers

[steved] 02/10/2011 14:52

ygor705

You raise an interesting point surrounding RWD's future strategy. They have always stuck to their milk processing guns but there must be a limit to market size in this sector and as you have highlighted 40% share of the liquid milk market is already substantial.

With little or no debt on the balance sheet a move to become a more broadly based food processor could be on the cards sooner or later? If it were to occur IMHO this would be viewed positively by the market, especially if RWD proved to be as shrewd at making cheese and butter as they have been at processing milk for a sustained period?

[ygor705] 02/10/2011 11:57

This share interests me. RWD now have 40% of the UK liquid milk market and it operates very efficiently. To me, this may mean that the supermarkets are getting close to the point where they cannot do without them .....a view perhaps supported by the recent price increase announcement. The balance sheet also looks strong.

The negative side of the RWD equation are the cost pressures in an inflationary environment and its ability to pass these on to the customer via an unforgiving supermarket environment. The market is undoubtedly reacting to this issue.

The interesting variable for me is what is happening in the international milk products market. Butter prices are sky high and there is an increasing demand for cheese from China. The old Milk Marketing Board always maintained a milk processing capacity to turn excess milk capacity into butter or cheese and then sell it into the EU under intervention rules. A slightly modified opportunity appears to be opening up for RWD in international markets and I'm watching for an announcement of some capex spend on basic butter and cheese processing capacity. The balance sheet can stand it.

The share price is at a 5 year (at least) low and the yield is 6% plus. Maybe not time to rush in but certainly one to buy on weakness.

[muffinhead] 30/9/2011 17:34

HFT computer algorithm let loose today

dull trading statement reinforces analyst forecasts

wouldn't be surprised to see 300p support smashed looking at weekly candle

[p bear] 27/9/2011 12:33

Robert Wiseman Dairies (LSE: RWD) is probably the dullest share on the list. And I like boring, defensive shares.

As you might expect, the dairy giant's shares haven't suffered much in the summer sell off. But the well-covered yield of 5.9%, and net tangible assets (NTAV) per share of 221p make it a safety-first buy for me at 306p.

I just hope the market presents another generalised opportunity.

[muffinhead] 18/9/2011 20:11

DCG trading update tomorrow

.

[muffinhead] 26/8/2011 14:43

hmm...September trading statement timing and "market swoon"

[muffinhead] 10/8/2011 12:29

the mystery of price discovery!!

[muffinhead] 03/8/2011 20:46

food, electric/water, healthcare and energy...all essential stuff

[muffinhead] 02/8/2011 19:31

Was not expecting todays move after yesterday...weird. I could sware Wiseman doesn't trade on LSE or Plus market...anyone know what makes these moves that don't show up as trades

ex-div tomorrow...so happy with that

[randomwalker] 01/8/2011 17:12

Good rally towards the end, on a down day with lots of nervousness.

At some point the analysts will see that RWD has already made the investment in modern plant, and that Dairy Crest is going to have to do so now. Looking at today's share movemnents that seems to be happening already.

Now what we need is a branded cheese. How about Lymeswold? ;-)

[muffinhead] 27/7/2011 11:31

Robert Wiseman Dairies: Profits to be Milked?
Thursday, May 19 2011 by Mark Carter

[masurenguy] 26/7/2011 13:47

Stuck between a rock and a hard place: Robert Wiseman Daries

Introduction
Robert Wiseman procures, processes and distributes milk in the UK. It claims to supply 1/3rd of milk consumed in the UK, can supply milk to 100% of postcodes in Great Britain and holds a market share of roughly 40%. The share price took a 30% hit back in September 2010 and hasn't really recovered since. RWD has been already been looked at by Cautious Bull, UK Value Investor and Mark Carter. As with most value situations the reasons are quite legitimate as the company has seen its margins come under severe pressure. The reasons for this are probably quite involved so we will leave this discussion till later.

What is worth mentioning at this stage is that since 1996 the company has grown revenue in every year. Any problems have always expressed themselves through margins and, more specifically, within the cost of goods line. Indeed, since 1996 revenue CAGR has been 12.9% but COGS CAGR has been 13.3% but this trend of faster COGS growth only emerged after 2008. As value investors, we have to pick carefully through lots of companies separating those that are fundamentally broken from those that are experiencing some cyclical trouble . With RWD, the situation may or may not be cyclical but it is certainly the most threatening period since the company's flotation in 1994. What this means for valuing the company is that we have to take quite pragmatic fashion. Historical statements are relevant but we will have to take a closer look at industry factors. Often this is difficult but we have a wide range of useful data available on the internet and Parliamentary inquires by DEFRA give us some insights into what people in the industry are thinking about.

Operating Metrics
From the above tables, we can see that, apart from a blip in 2009, the past five years have been tremendously good for RWD. What we notice is that the company relies on turning its operating assets over lots of times on very thin margins. In terms of operating assets, we see that the company has increased assets by £20m in the past five years but revenues have grown by some £300m. What is interesting is that we would expect the processing part of RWD's business to be fairly capital intensive, it involves machines and factories after all, so we would expect operating assets to trace movements in revenues fairly closely. What we find looking at the historical PPE turns is that this has broadly happened as revenue per dollar of PPE has grown from around £2.50 in 2001 to nearly £4 in 2011. However, this trend has slowed significantly in the past five years. Instead, the improvement in net operating asset utilization has come from its growing creditor balances. If revenue growth resumes there will probably quite a large improvement in NOA turns.

Looking to margins, we can see that these have slid slightly in the last year. The competitive position of RWD is quite complicated as it stands between the retailer and producer. As we can see though, the most important trend has been that big increase in COGS since 2007. The most important of these recent trends are the increasing prices of raw materials such as fuel and resin used in packaging, a price war by retailers and rising operating costs for farmers. The competitive dynamics are slightly more complex than this but this is the basic outline of the situation. We also see that the company has worked on taking S&D costs out of the business and these are now at all time lows although this has had very little impact compared to the move in COGS. The company is also committed to being environmental sustainable. Usually, I am fairly skeptical of these programs as they seem to have little effect on the underlying business. For RWD, this appears to be quite different as the environmental program seems to be focused on taking significant costs out of the business.

Financial Condition
From the second table, we can see that net debt has fallen to around £5m and the EBIT/Interest expense multiple is at 35x, well above the three year average of 29x. I think reducing this was probably a pretty good use of cash as having a lot of debt while the industry goes through a potentially difficult period isn't too helpful. The dividend has also been pretty generous in the past five years. I think this is perhaps slightly less fortunate as some of this cash may be needed to invest in margins if pricing continues to be difficult.

Recent Trends/Competitive Position
On first glance, the industry seems quite simple. RWD buys the milk from farmers, the milk is processed, it is sold to supermarkets. However, the industry is slightly more complicated than that. First, I will discuss what how the industry structured, what this means for the competitive positions of the groups involved and, particularly, for the processors. I will follow this with discussing some of the more recent trends in the industry and then ask how RWD fits into these trends. The most important factor in defining industry structure is probably the use of "direct supply" contracts. These are contracts between a producer and either a processor or a processor/retailer duo. The contract locks a producer into receiving a certain price for milk over a fixed period of time (usually 12 months but RWD offers 3 months). These contracts make up the majority of supply for processors however, some milk is supplied by the three producer co-operatives: First Milk, Milk Link and United Dairy Farmers.

The prevalence of "direct supply" contracts obviously introduces a significant amount of rigidity in the industry. Farmers will be stuck with a price for a certain length of time while they could be facing volatile raw material costs. For processors and retailers the situation is slightly more favorable. Processors gain some certainty about margins and capacity however, they still face rising raw materials (fuel and resin) and are vulnerable to pressure from retailers. Retailers began making these contracts directly with farmers in 2004 to secure their supplies for milk. Retailers usually have to pay a premium of around a penny on each litre to secure these contracts. Out of all groups, they probably have the most to gain. One exception to this trend though appears to be Tesco's Sustainable Dairy Group who pay prices that move with changes in the farmer's cost of production. My rough look at the industry suggests that most farmers have direct supply contracts with processors. So the main effect of these arrangements is that we get pretty volatile margins for most of the participants. Recently, farmers have come under pressure with the rising price of raw materials (cows, feed, fuel and fertilizer) and it seems to be consensus that farmers are currently selling below their cost of production. The EU Commission recently proposed changes to the system of contracts to try to ease the pressure on farmers and DEFRA is currently collecting evidence from the main industry bodies about these proposals.

So processors stand in the middle of this trying to make money from the spread between farmgate and retail prices. This can be extremely challenging as the factors determining these two prices are often completely different. In the first table, we see the farmgate, processing and retail prices since 2005. The gross margin for processors has stayed quite constant over the period moving from 30ppl to around 40ppl in April 2010. What is more noticeable is the increase in retailer gross margin from 40ppl to 60ppl towards the end of the period. Interestingly, the margins continued to increase after the supermarkets/processors admitted price fixing in late 2008. Unfortunately, the processing prices appear to get updated annually so we can't tell what has happened more recently. It isn't difficult to see though that the current situation is quite troubling.

The trends in production and consumption are somewhat harder to come by. From my reading about the industry, it appears that production over the past five years or so hasn't been too good however, there has been some recovery at the start of this year. The data would suggest the same, production through the start of the year has been up quite a bit from production in the previous two. However, I am not too sure about the interpretation of some of the data. Consumption is also quite tricky. DEFRA publishes consumption based on per person per week however, the raw data isn't included. DEFRA's figures show that consumption of milk per person per week has been declining slowly for quite a while. We see that retailers cut the price of milk massively in mid-late 2010 and farmgate prices have slowly crept up with the large increases in the cost of production. When discounting, retailers often focus on the everyday items to draw custom in and this appears to be what has happened here. As mentioned earlier, the pressures on farmers have been through, substantially, all the raw materials they use in production. For processors, this means a far slimmer margin as they buy at a higher price and sell at a lower one. It wouldn't be surprising, looking at the above table, that margins had slimmed to around 15ppl which is far lower than any data I have going back to 1999.

Focusing on RWD and its position in the industry we can see from the table above that its probably the industry leader with around 40% of the share of volume amongst major retailers. At the DEFRA inquiry, RWD stated that its market share of the liquid milk market was around 31%. As mentioned already, RWD is suffering from the increase in resin and fuel costs. The company also highlights the fairly flat bulk cream prices. Whilst Arla and Dairy Crest utilize the "leftovers" of the milk processing operations to make butter and cheese, RWD sells most of it on (it does produce small amounts of cream). Interestingly, MP Neil Parish questioned this strategy in the DEFRA inquiry asking if the company had any plans to extend beyond liquid milk and the company representatives affirmed the strategy of sticking with processing liquid milk.

Another factor the company highlights is the prices it offers farmers. The company offers the shortest resignation period and highlights the low levels of actual resignations. In the written evidence to the DEFRA committee it uses a fourteen year average of farmgate prices to compare itself to other companies which is perhaps slightly misleading as the market dynamics have changed considerably since then. Dairyco published a league table of all farmgate prices under aligned (i.e with a supermarket which offer the premiums) and standard contracts. These tables suggest a slightly less favorable picture (and compared to slide 12 in the recent trading update) with its standard price being under Arla by 0.02ppl and 1ppl or so below smaller operations like Wyke. Its aligned contracts are certainly competitive but the Tesco Sustainable Dairy Group contract leads at 29.72ppl. The company argued at the DEFRA inquiry that basing contract price on farmer's cost of production (as in TSDG contracts) wasn't realistic as the prices for each industry participant was determined by different factors. Whilst this certainly is true for farmgate and retail prices it is less convincing for processors which are, to a certain extent, stuck with the spread. However, I think RWD's claim that they run their business on a mutual trust with farmers and that this works appears to be a legitimate claim.

My view of RWD's position is that it has built its relationship carefully with farmers, it has concentrated on what it does best and I think that although the current times appear difficult the company seems to have an effective strategy to maintain its position. It has certainly shown good faith by investing in margins over the last few years and this should build up some goodwill with its customers and suppliers. The most important recent event though has been the decision of supermarkets to price more competitively and if this continues it may make RWD's position difficult as it doesn't have much of a fallback strategy and supermarkets have been aggressive in securing supply.

Valuation
The two tables above show RWD's historical valuation and we see that RWD is pretty much right at the bottom of the range since 2004 (the blue broken line is the current valuation). This is a fairly good sign but can be explained by that fact that processor margins are probably at all time lows. Looking to my usual model, I am again going to have to over-ride it and input some more creative scenarios for the margin figures. Margins are going to be the focus of this analysis and I am going to assume in all cases revenue growth of 4% over the next five years, constant net debt and the same growth in net operating assets as the past five years. Whilst these figures probably aren't accurate, they are conservative which should be important in preventing any serious errors.

Base Case – Margins fall to 1.5% and add 25bps every year over the next five years.
Worst Case – Margins fall to 1% and add 25 bps every year over the next five years.
Best Case – Margins fall to 1.5% and add 100bps for the next three years until they reach the high of 4% (the high of the past five years) and stay at 4% in the last year.

Conclusion
The milk industry is a tough and competitive industry to be involved in. However, it is interesting that most sides in the current Parliamentary inquiry still relished the competitive challenge and transparency in the industry at the moment (especially relative to the old Milk Marketing Boards). Processors are, at the moment, stuck between a rock and a hard place being pushed both by producers, who are probably selling slightly under cost (some suggest around 29ppl) and retailers, who have been engaged in something of a price war since the end of last year. However, these factors, although damaging, are cyclical.

RWD is a concentrated operation that has built up enough market share and goodwill with its suppliers and customers to weather this period. It has focused on taking fixed costs out of the business meaning if COGS improves margins will spring back quickly, it has worked to push its creditors meaning NOA turns will spring if revenue growth improves only slightly and it has reduced debt. The latest price figures suggest that RWD is probably still getting squeezed which means caution should still be exercised but pressure may ease up with the seasonal trends in consumption later on in the year.

This positive view is obviously interesting considering that RWD is undervalued, at most, in the base case scenario by around 15%. However, what I see going forward is fairly limited downside and a significant upside if things improve slightly. At this stage, risk has to be limited as the situation with margins still is uncertain but the potential for good gains is definitely present.

[muffinhead] 13/7/2011 16:42

Leading dairy companies cooperating in milk marketing drive

[muffinhead] 13/7/2011 16:38

General food inflation



Fresh milk price trend at new high

[muffinhead] 07/7/2011 21:41

Milk supplier Robert Wiseman signals price hike