SIF April review: Tatton Asset Management amp;amp; Wynnstay

Many thanks for all your comments on my SIF annual review last week. I do read them all. I’m still thinking through the implications of changing my methodology and will post an update here when I’m ready to move ahead.

In the meantime, I’m maintaining my existing processes for buying and selling stocks from SIF. As it’s the last week of the month, this means it’s time to review shares that have been in SIF for at least nine months.

Two companies make the cut this month. Both have been strong performers since I added them to SIF in July 2020:

• Tatton Asset Management: this small cap offers a suite of services to financial advisers, including asset management

• Wynnstay: manufacturer and supplier of agricultural products, such as animal feed

I’ll look at each of these in more detail in a moment. But let’s start with a look at the performance of the portfolio over the last month.

SIF folio: April performance

The portfolio has gained 6% over the last month. This has kept SIF ahead of the market and lifted the folio to a new all-time high:

After last month’s sales, the cash position remains very high, at roughly 33%:

Finally, here’s a full list of the portfolio’s holdings on 26 April, before any transactions that might result from this review:

Now let’s move onto the individual stock reviews.

Tatton Asset Management (LON:TAM)

(Buy report: 08 July 2020)

Tatton’s share price hit a new record high last week after the company issued a bullish full-year trading update, bumping up guidance for the year ended 31 March 2021:

“The Board expects FY21 results to be ahead of all analysts’ forecasts”

The main highlight seems to have been Tatton’s investment management business. This provides discretionary fund management services for financial advisers. According to management, net inflows rose by 30% to £427m during the second half of the year, compared the first half period. 

Net inflows for the full year were £755m, representing 11% of opening assets under management:

Mortgage activity has also been strong, thanks in part to the boost provided by the stamp duty holiday. Tatton says gross lending rose by 20% to £6bn during the second half, giving a full-year total of £11bn.

By acting as an intermediary, Tatton is able to maintain a capital-light structure that generates high returns on equity and strong free cash flow. These attractions remained in place last year despite the difficult circumstances:

According to Stockopedia, consensus forecasts for the 2020/21 financial year have been lifted by 0.4p to 13.6p per share. A further 16.5% increase is pencilled in for the current financial year. 

These forecasts put the stock on a rolling forecast P/E of 27, with a 2.7% dividend yield. When I bought the stock in July 2020, the rolling P/E was 21 and the dividend yield 3.6%. 

My view: Tatton has become more expensive over the last year. But I don’t think the stock is necessarily overpriced, given the strong profitability and net cash status of the business. 

I’m also encouraged by the presence of founder-CEO Paul Hogarth, who controls 18.3% of the stock. I’d hope this would prevent any rash expansion projects:

Tatton’s business is clearly very profitable. It has also grown consistently since its 2017 flotation:

My main concern is the potential cyclicality of the business. I can imagine that net inflows and mortgage business might dry up in a market crash or UK recession. 

However, there’s no sign of this happening just yet. It may also be worth noting that earnings forecasts for FY21 and FY22 are still below pre-pandemic levels. If the economic recovery continues, then I suppose this could give scope for further upgrades:

Should I keep Tatton Asset Management in SIF? I find that the stock still passes all of the rules in my sell screen. So I’ll hold onto the stock for at least one more month. Full-year results are due in late June – ideally I’d hold onto until then to get a fresh set of data through the algorithms.

Total return to date: +49%

Verdict: Hold

Wynnstay (LON:WYN)

(Buy report: 15 July 2020)

Wynnstay is a £93m AIM firm that manufactures and supplies a wide range of agricultural products, such as animal feed, crop seed and farm supplies. Most items are consumables which are likely to be repeat purchases from a regular supplier. 

It looks like a nice defensive business to me, but it doesn’t seem an obvious candidate for rapid growth. Indeed, when I bought the stock in July last year, it was Wynnstay’s value credentials and underlying quality which appealed to me.

However, Wynnstay has been another beneficiary of the strong market conditions we’ve seen since November. SIF’s holding has risen by around 55% and benefited from a 4.6% dividend yield over the last nine months. 

So where are we now? Wynnstay’s annual results for the year to 31 October 2020 showed a slightly mixed picture. Although revenue fell by 12% to £431m, underlying pre-tax profit rose 4% to £8.4m. The fall in revenue relates to commodity price deflation, rather than falling sales. This emphasises the pass-through nature of much of the group’s revenue (I covered this in more depth in my original buy report).

Cash generation was good and Wynnstay’s balance sheet still looks very healthy to me. Net cash excluding lease liabilities rose to £14.7m, from £3.8m in 2019. Net assets per share rose to 492p, suggesting that the current share price of c.470p remains asset backed.

As we can see from the valuation graphic below, the stock still scores highly for value. But it is more expensive on all measures than it was last July:

Wynnstay TTM valuation: July 2020 (L) vs April 2021 (R)

Margins and return on capital for the year were in line with historical norms, albeit profitability seems to have worsened over the last five years:

My view: I think it’s fair to say that organic growth opportunities are likely to be limited for Wynnstay. I believe that most growth will come from bolt-on acquisitions which help to consolidate a fragmented market.

The StockReport shows us that Wynnstay’s annual revenue growth has averaged just 2.7% since 2015, while average earnings have fallen. Profitability has worsened too, as I mentioned above.

Broker forecasts suggest single-digit percentage growth in sales and earnings in FY21 and FY22. With the stock now trading on more than 13 times forecast earnings, I don’t see any obvious reason to expect further re-rating. The consensus rating has been cut to hold over the last three months.

Turning to my sell screen, Wynnstay’s rolling forecast PEG ratio of 2.7 is well above my maximum of 1.8. This supports my view that the stock is probably fairly valued, given the likely rate of growth.

I’m going to sell Wynnstay from SIF this month, and from my personal holdings. As always, both trades will take place after this article has been published.

Total return: +59%

Verdict: Sell

Disclosure: At the time of publication, Roland owned all the shares listed in SIF.

Stockopedia