Fuels Consolidation And Food Logistics Headwinds Will Pressure Margins Yet Long-Term Upside Remains

Catalysts

About NWF Group

NWF Group is a specialist distributor connecting fragmented fuel, food logistics and animal feed markets to large suppliers through integrated storage, processing and distribution networks.

What are the underlying business or industry changes driving this perspective?

• Although the rollout of the regional Fuels operating model is improving miles per drop and price per liter, the complexity of consolidating 30 depots into 9 hubs could dilute the efficiency gains and limit the anticipated uplift in operating margins and earnings.
• Although the Lymedale warehouse adds 39 percent additional capacity in a structurally growing outsourced grocery logistics market, any prolonged weakness in customer volumes or slower onboarding of new brands could keep utilization below optimal levels and cap Food revenue growth and margin expansion.
• While the moist feeds investment taps into rising demand for higher nutrition and more sustainable dairy rations, reliance on variable brewing byproducts and potential policy changes to the government energy support scheme could erode the cost advantage and temper profit per tonne in Feeds.
• Although continued consolidation of the highly fragmented U.K. fuel distribution market offers scope to add scale, integration risk, higher finance costs from fleet renewals and potential long term decline in heating oil usage could constrain returns on capital and future headline profit growth.
• While strong cash generation and a robust balance sheet support ongoing capital deployment across fuels, food warehousing and feed manufacturing, competing demands from acquisitions, fleet and warehouse investments and pension obligations could limit flexibility and slow the pace at which revenue and EPS accretion is realized.

Assumptions

This narrative explores a more pessimistic perspective on NWF Group compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts. How have these above catalysts been quantified?

• The bearish analysts are assuming NWF Group's revenue will grow by 4.0% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 0.7% today to 0.9% in 3 years time.
• The bearish analysts expect earnings to reach £9.3 million (and earnings per share of £0.18) by about December 2028, up from £6.2 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 13.6x on those 2028 earnings, up from 10.4x today. This future PE is greater than the current PE for the GB Oil and Gas industry at 10.0x.
• The bearish analysts expect the number of shares outstanding to grow by 0.28% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.97%, as per the Simply Wall St company report.

Risks

What could happen that would invalidate this narrative?

• A structural decline in domestic heating oil usage as households transition over time to alternative low carbon heating solutions would erode Fuels volumes in one of NWF Group's core markets, putting sustained pressure on revenue and limiting margin expansion in that segment, which in turn could weigh on group earnings growth.
• Persistent weakness in economically sensitive SME sectors such as construction, which already represent a material share of fuel volumes, could become a longer term feature rather than a cyclical headwind, constraining volume growth and dampening net margins in Fuels and therefore constraining profit before tax progression.
• If the new Lymedale warehouse and wider Food network continue to ramp up more slowly than expected, or the outsourced grocery logistics market grows more slowly than anticipated, underutilization of capacity could become embedded and result in structurally lower operating leverage, limiting revenue growth and compressing operating margins in Food.
• In Feeds, long term changes in agricultural policy, herd sizes, or milk pricing, combined with the inherent volatility and supply risk of brewing byproducts used in moist feeds, could reduce demand or raise input costs, thereby capping volumes and squeezing operating profit per tonne, which would slow overall earnings growth.
• Ongoing capital intensity from fleet renewals, warehouse investments and acquisitions, together with higher structural finance costs and any future pension demands, could offset strong cash generation, limiting the capacity for value accretive reinvestment and potentially diluting return on capital employed and earnings per share growth over time.

Valuation

How have all the factors above been brought together to estimate a fair value?

• The assumed bearish price target for NWF Group is £2.0, which represents up to two standard deviations below the consensus price target of £2.42. This valuation is based on what can be assumed as the expectations of NWF Group's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £2.83, and the most bearish reporting a price target of just £2.0.
  
• In order for you to agree with the more bearish analyst cohort, you'd need to believe that by 2028, revenues will be £1.0 billion, earnings will come to £9.3 million, and it would be trading on a PE ratio of 13.6x, assuming you use a discount rate of 8.0%.
  
• Given the current share price of £1.3, the analyst price target of £2.0 is 34.8% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.