Diversification combats headwinds and floods

Carr's Group 5 January 2016 Update

Carr's Group

Diversification combats headwinds and floods

AGM and IMS

Food producers

5 January 2016

Price

149.5p

Market cap

£134m

Net debt (£m) at end November 2015

31.9

Shares in issue

89.8m

Free float

78%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

12.6

(1.5)

0.6

Rel (local)

12.5

(1.0)

3.2

52-week high/low

178p

134p

Business description

Carr’s Agriculture division serves farmers in the North of England, South Wales, the Borders and Scotland, the US, Germany and New Zealand. The Food division mills flour in the UK. The Engineering division offers remote handling equipment and fabrications to the global nuclear and oil and gas industries.

Next event

Interims

11 April 2016

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

Roger Johnston

+44 (0)20 3077 5722

Carr's Group is a research client of Edison Investment Research Limited

Carr's interim management statement for the first 18 weeks of FY16 shows that its strategy of innovation, investment and internationalisation is able to counter the impact of headwinds in many of its markets, enabling it to achieve another year with profits at the record levels achieved in FY15. The announcement notes that Carr’s is trading in line with expectations, so we leave our estimates and valuation of 205p/share unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/14

429.0

17.0

13.2

3.4

11.3

2.3

08/15

411.6

18.1

14.0

3.7

10.7

2.5

08/16e

403.2

18.1

13.9

3.8

10.8

2.5

08/17e

409.2

18.3

14.1

3.9

10.6

2.6

Note: *PBT and EPS are normalised, excluding intangible amortisation, exceptional items and share-based payments.

Geographical reach de-risks impact of weather

Overall, Agricultural performance was in line with management’s expectations, despite the impact of depressed livestock and farmgate milk prices, which had been anticipated, and very mild UK weather plus flooding in Cumbria, which affected the Lancaster feed-mill, which had not. The retail operation benefited from the acquisition of Green (Agriculture) Co at Morpeth in September 2015 and of Reid & Robertson with outlets in Balloch, Ayr and Oban, acquired in June 2015. The US feed block operations performed well, building on market share gains in FY15. Further growth is expected following the completion of the Nevada redevelopment project in December, which is now outputting branded feed-blocks.

Revival in nuclear balances weakness in oil

The revival in contracts from the nuclear industry has resulted in a strong start to the year at MSM following a significant contract from Sellafield. Wälischmiller has a number of contracts for completion in summer 2016. Bendalls has been awarded several new contracts from Sellafield, requiring both manufacturing and the newly developed design capability, with delivery due through to 2019. This is in addition to four contracts in the nuclear industry tendered jointly with Chirton, which are for delivery through 2016. These joint projects will help offset the expected weakness in demand from the oil & gas industry resulting from low oil prices. One of the Flour division’s customers has been directly affected by the floods in Cumbria, resulting in a short-term reduction in sales; however, like the flooding at the Lancaster feed-mill, this is fully covered by insurance. Both the Engineering and the Flour divisions are trading in line with management's expectations.

Valuation: Potential for share price appreciation

The share price has dipped by over 9% since early December, possibly because of concerns about the recent UK floods. The shares are trading on a year 1 P/E ratio that is low compared with sector averages (14.6x global agricultural suppliers, 14.0x UK food producers, 15.7x German industrials). The diversification strategy limits the overall impact of these events so the discount appears unwarranted.

Exhibit 1: Financial summary

£m

2014

2015

2016e

2017e

2018e

Year-end 31 Aug

PROFIT & LOSS

Revenue

 

 

429.0

411.6

403.2

409.2

415.0

EBITDA

 

 

20.9

22.2

22.0

22.0

22.2

Operating Profit (pre amort. of acq intangibles & SBP)

 

15.8

17.0

16.6

16.5

16.8

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Share-based payments

(0.4)

(0.6)

(0.6)

(0.6)

(0.6)

Exceptionals

0.0

0.0

0.0

0.0

0.0

Operating Profit

15.4

16.4

16.0

16.0

16.2

Net Interest

(1.4)

(1.2)

(1.0)

(0.8)

(0.8)

Share of post-tax profits in JVs and associates

2.5

2.3

2.5

2.6

2.7

Profit Before Tax (norm)

 

 

17.0

18.1

18.1

18.3

18.7

Profit Before Tax (FRS 3)

 

 

16.6

17.5

17.5

17.8

18.1

Tax

(3.7)

(3.8)

(3.8)

(4.0)

(4.0)

Profit After Tax (norm)

13.3

14.3

14.2

14.4

14.6

Profit After Tax (FRS 3)

12.9

13.7

13.6

13.8

14.1

Minority interest

(1.5)

(1.7)

(1.7)

(1.7)

(1.7)

Net income (norm)

11.8

12.6

12.5

12.7

12.9

Net income (FRS 3)

11.4

12.0

11.9

12.1

12.4

Average Number of Shares Outstanding (m)

89.0

89.6

89.8

89.8

89.8

EPS - normalised (p)

 

 

13.2

14.0

13.9

14.1

14.4

EPS - normalised fully diluted (p)

 

 

12.8

13.6

13.5

13.6

13.9

EPS - FRS 3 (p)

 

 

12.3

13.4

13.3

13.4

13.8

Dividend per share (p)

3.4

3.7

3.8

3.9

4.0

EBITDA Margin (%)

4.9

5.4

5.4

5.4

5.4

Operating Margin (before GW and except.) (%)

3.7

4.1

4.1

4.0

4.0

BALANCE SHEET

Fixed Assets

 

 

83.4

86.5

90.3

89.2

88.2

Intangible Assets

10.3

11.3

11.1

10.9

10.9

Tangible Assets and Deferred tax assets

73.1

75.2

79.2

78.3

77.4

Current Assets

 

 

114.3

116.9

113.1

105.1

108.2

Stocks

33.3

35.0

35.4

29.1

29.6

Debtors

63.7

65.3

66.1

56.9

57.7

Cash

17.3

16.5

11.7

19.0

20.9

Current Liabilities

 

 

(75.6)

(70.2)

(66.8)

(53.4)

(51.0)

Creditors including tax, social security and provisions

(55.9)

(55.0)

(54.7)

(44.3)

(44.9)

Short term borrowings

(19.7)

(15.2)

(12.2)

(9.2)

(6.2)

Long Term Liabilities

 

 

(32.3)

(34.2)

(30.2)

(26.2)

(22.2)

Long term borrowings

(22.2)

(25.7)

(21.7)

(17.7)

(13.7)

Retirement benefit obligation

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(10.1)

(8.5)

(8.5)

(8.5)

(8.5)

Net Assets

 

 

89.8

99.0

106.3

114.7

123.1

Minority interest

(10.2)

(11.9)

(11.9)

(11.9)

(11.9)

Shareholders equity

 

 

79.7

87.1

94.4

102.8

111.2

CASH FLOW

Operating Cash Flow (net of contribution to pension fund)

 

 

17.1

15.1

19.8

27.0

21.6

Net Interest

(1.4)

(1.2)

(1.0)

(0.8)

(0.8)

Tax

(3.2)

(4.0)

(3.8)

(4.0)

(4.0)

Investment activities

(7.5)

(4.0)

(8.4)

(4.4)

(4.4)

Acquisitions/disposals

(3.6)

(1.7)

(1.0)

0.0

0.0

Equity financing and other financing activities

(4.1)

(1.8)

(7.0)

(7.0)

(7.0)

Dividends

(2.9)

(3.1)

(3.3)

(3.4)

(3.5)

Net Cash Flow

(5.7)

(0.7)

(4.8)

7.4

1.9

Opening net debt/(cash)

 

 

22.1

24.6

24.4

22.2

7.9

HP finance leases initiated

(2.3)

0.0

0.0

0.0

0.0

Other

(5.5)

(0.9)

(7.0)*

(7.0)*

(7.0)*

Closing net debt/(cash)

 

 

24.6

24.4

22.2

7.9

(1.0)

Source: Edison Investment Research, company accounts. Note: *Repayment of long-term debt. EPS and DPS are stated after 10-for-1 share split.

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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