Wynnstay – Owner earnings and intrinsic value

PUBLISHED: Jan 16 2020 @ 03:59 | Comments (0) |

Wynnstay (LSE:WYN) has shown average conventional earnings of 29.3p per share over ten years. With the 19.7m shares it has in issue today if it earned 29.3p per share then that would be a total of £5.77m. If I was to assume that this will be the earnings attributable to shareholders and, importantly, available to shareholders to remove from the company in each of the future years then I might value the equity at £72.1m:

£5.77m/0.08 = £72.1m

(The current market capitalisation of WYN is £62.4m)

But conventional earnings does not usually adequate allow for the fact that with some companies earnings cannot be taken out of the company if it is to maintain its unit volume of output, spend enough to maintain its economic franchise (e.g. on working capital, new machinery, marketing, service quality, employee training, etc.) and invest in all value enhancing projects.

Some firms have to invest so heavily in these items that little of the conventional earnings can be taken out by shareholders.

Owner earnings is more useful than conventional earnings for getting at the amount shareholders can take after allowing for necessary investment to maintain the quality of the business.

“Owner earnings” in the past

£000s YEAR	2013	2014	2015	2016	2017	2018
Profit after interest and tax deduction	6,171	6,697	6,670	5,829	6,305	7,708
Add back non-cash items such as depreciation, goodwill and other amortisation	2,523	2,519	2,675	2,783	3,057	3,311
Totals to: Amount available for distribution to shareholders before considering the need to spend on fixed capital items to maintain the company’s economic franchise, unit volume and invest in value generating projects.	8,694	9,216	9,345	8,612	9,362	11,019
Deduct fixed capital expenditure (other than property) and WC increases. (The figures shown are actual expenditures and are therefore a rough proxy for the ‘needed’ expenditures to maintain franchise, etc)	+819	-1,491	-4,053	-3,719	-6,140	-11,327
Owner earnings	9,513	7,725	5,292	4,893	3,222	-308

There are some years when WYN put large amounts into working capital. For example, in 2018 inventories jumped by £19.1m and receivables by £7.9m, with offsetting increases in payables at £17.4m that left the increase in WC at £9.5m. On the other hand, in 2013 £2m was released from WC.

From the table, average o

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