Engineering growth continues

Carr's Group 11 November 2019 Update
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Carr's Group

Engineering growth continues

FY19 results

Basic materials

11 November 2019

Price

145p

Market cap

£133m

Net debt (£m) at end August 2019

23.8

Shares in issue

91.9m

Free float

84.9%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.7

(2.4)

(3.5)

Rel (local)

3.1

(4.2)

(6.7)

52-week high/low

173p

130p

Business description

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

Next event

AGM

7 January 2020

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

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

Carr’s Group delivered a 7.0% increase in adjusted profit before tax during FY19 despite adverse weather conditions in both the US and the UK, which affected demand for feed blocks, animal feed and fuel. The profit growth was attributable to a strong performance from the Engineering division. We leave our FY20 and FY21 estimates broadly unchanged, nudge our indicative valuation up 6p to 190p/share and present FY22 estimates for the first time.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/18

403.2

17.7

15.2

4.50

9.5

3.1

08/19

403.9

18.9

15.6

4.75

9.3

3.3

08/20e

434.6

19.4

16.2

4.90

9.0

3.4

08/21e

439.6

20.0

16.8

5.10

8.6

3.5

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

Engineering improvement offsets weather challenges

Group revenues were virtually unchanged year-on-year during FY19 at £403.9m, with commodity price inflation, the Animax acquisition in September 2018 and high utilisation levels in the Engineering businesses compensating for lower volumes of feed block and feed. Pre-exceptional PBT (excluding amortisation of acquired intangibles and non-recurring items) rose by 7.0% to £18.9m, primarily because of the performance improvement in the Engineering division. This was ahead of our £18.1m estimate, in part because of a better than expected performance from NW Total following its acquisition in June 2019. Net debt rose by £8.4m during FY19 to £23.8m at the year end. This is primarily attributable to a £5.0m increase in working capital requirements: £4.5m capex, £10.2m on acquisitions, including deferred consideration paid and £4.2m dividend payments.

Contracts underpin further Engineering progress

Our estimates, which are broadly unchanged, show modest growth (2.5% in FY20 and 3.3% in FY21) in adjusted pre-tax profit. On the Agriculture side, we note the continued shift to high-margin branded product suitable for both domestic and international markets following the acquisition of Animax. On the Engineering side, we note that greater co-operation between activities has already helped the German robotics business win a US$8.5m contract in the US, which will benefit FY20, while the US operation won two significant Mechanical Stress Improvement Process contracts during FY19 which will primarily benefit FY21.

Valuation: Indicative valuation of 190p/share

Our DCF analysis gives an indicative value of 190p/share (previously 184p). At the current share price, Carr’s is trading below its peers with regards to the mean EV/EBITDA multiple (6.9x vs 8.2x) and P/E multiple (8.9 vs 12.6x) for FY20e. Confirmation that Carr’s diversified business model can continue to address issues caused by Brexit uncertainty plus news of further Engineering orders should, in our view, help close the valuation gap compared with the mean.

Financial performance

Divisional analysis of FY19 results

Exhibit 1: Divisional analysis of FY19 results

Year ended 31 August £m

FY18

FY19

FY20e

FY21e

FY22e

Agriculture revenues

359.6

357.4

378.2

382.0

385.8

Engineering revenues

43.6

46.5

56.4

57.6

58.8

Group revenues

403.2

403.9

434.6

439.6

444.6

Agriculture EBITA

10.0

10.9

11.0

11.2

11.3

Engineering EBITA

4.3*

5.3

6.0

6.2

6.4

Share of profits of JVs and associates

3.2**

2.7

2.7

2.9

3.0

Adjusted Group EBITA

17.5

18.9

19.7

20.3

20.7

Amortisation of acquired intangibles assets and non-recurring items

(1.1)

(1.7)

(0.8)

(0.8)

(0.8)

Reported Group EBIT

16.4

17.2

18.9

19.5

19.9

Source: Company reports, Edison Investment Research. Note: *Excluding £0.2m loss attributable to JV. **Including £0.2m loss attributable to Engineering JV.

Agriculture (£357.4m revenues, £13.6m EBITA including JV)

Divisional revenues declined by 0.6% year-on-year, reflecting lower volumes of feed blocks, feed and fuel, offset by commodity price inflation and the acquisition of Animax in September 2018. Adjusted operating profit (including profit from JVs) increased by 1.6%, reflecting the beneficial impact of Animax with its complementary animal health product portfolio.

The wetter weather conditions in the US at the interim stage continued during H2, muting feed block demand. Despite being able to access additional geographies following the commissioning of the low-moisture feed block plant in Tennessee in January 2018, total volumes declined by 2.5% year-on-year. Mild weather in the UK and mainland Europe during H119 contrasted with much colder and wetter conditions during H118, resulting in feed block volumes decreasing by 16.4% in the UK for the year as a whole and 8.0% in mainland Europe (6.4% decline globally). Management mitigated the impact on profitability through improved efficiencies and better procurement. As flagged at the AGM, the mild, dry weather reduced demand for compound feed (volumes down 10.0%, which was in line with the market overall) and fuel (volumes down 6.2%). Including acquisitions, retail sales grew by 0.9%, 2.1% on a like-for-like basis because of the store rationalisation following the purchase of Pearson Farm Supplies in October 2017.

UK farmer confidence has been adversely affected by concerns about the likelihood of a no-deal Brexit. This has manifested as a 2.8% drop in machinery revenues, albeit against record-high comparatives. As with feed blocks, management addressed these issues through a combination of improved efficiencies and good procurement, helped by supportive raw materials positions.

Looking forward, our divisional estimates, which are broadly unchanged (see below) model modest improvements in divisional revenues and profits. This is based on the probable expansion of the grazing area in the US following the prolonged rain, increased penetration of the Canadian market and enhanced distribution of Animax’s products through the division’s existing sales channels. In the longer term, we expect divisional revenue to benefit from the formation of a direct sales operation for feed blocks in New Zealand. We expect management to continue to make small acquisitions to add to the Country Store portfolio. These will be both within the existing geographical footprint and in adjacent regions where the offer is compatible. We do not expect significant expansion eastwards in the UK into predominantly arable farmland.

Engineering (£46.5m revenues, £5.3m EBITA)

Divisional revenues increased by 6.7% and adjusted EBITA by 25.1%.

The UK service and manufacturing business performed well as it worked on a strong order book backed by long-term contracts from the nuclear industry. Importantly, changes in management in both the fabrication and precision engineering businesses helped raise profitability and delivered a significant uplift in the forward order book and opportunity pipeline. Segmental revenues rose from £18.4m in FY18 to £23.0m, helped by two months’ contribution from NW Total Engineered Solutions. The US$8.5m US contract for remote handling equipment from the German business demonstrates how working with NuVision (acquired in August 2017) is securing access to the hitherto impenetrable US market. While the contract has helped top up Wälischmiller’s order book following completion of the substantial Chinese orders in FY18, most of the revenues under the contract will not be realised until the manufacturing phase commences in FY20, so revenues from the Global Robotics segment dropped from £19.5m in FY18 to £14.4m. The Global Technical Services business performed well, with revenues rising from £5.7m to £9.1m.

The strength of the divisional order book, which is based on long-term contracts from the nuclear industry, underpins our divisional estimates, which are broadly unchanged. The order book includes two significant Mechanical Stress Improvement Process contracts won during FY19, which primarily benefit FY21. Funding from the US Department of Energy to develop a small-scale working prototype of NuVision’s passive cooling technology, which is intended to prevent a repeat of the Fukushima tragedy, potentially opens a new product area longer term. While the German robotics order book is weaker than last year following the completion of the substantial Chinese orders, management remains confident of securing further sales of German equipment in the US through NuVision’s sales channels.

Group performance

P&L

Group revenues were virtually unchanged year-on-year during FY19 at £403.9m, with commodity price inflation, the Animax acquisition and high utilisation levels in the Engineering businesses compensating for lower volumes of feed blocks and feed. Pre-exceptional PBT (excluding amortisation of acquired intangibles, acquisition expenses and a £0.8m charge relating to an increase in pension liabilities following the High Court ruling to equalise the Guaranteed Minimum Pension for men and women) rose by 7.0% to £18.9m, primarily because of the performance improvement in the Engineering division. The full year dividend was raised from 4.5p/share to 4.75p/share.

Cash flow and balance sheet

Net debt rose by £8.4m during FY19 to £23.8m at the year end. This was primarily attributable to a £5.0m increase in working capital requirements: £4.5m capex, £10.2m on acquisitions, including deferred consideration paid and £4.2m dividend payments. The retirement benefit surplus reduced from £10.1m at end FY18 to £7.8m at end FY19. The group no longer makes deficit reduction contributions because the pension scheme was fully funded at the last full actuarial valuation.

Estimates

We leave our estimates broadly unchanged following the revisions made in July following the NW Total acquisition. Our minor adjustments reflect potentially lower levels of share-based payments going forward and higher levels of amortisation of acquired intangible assets. We present FY22 estimates for the first time.

Exhibit 2: Change in estimates

FY19

FY20e

FY21e

FY22e

£m

Old

Actual

Change

Old

New

Change

Old

New

Change

New

Agriculture revenues

372.6

357.4

-4.1%

378.2

378.2

0.0%

382.0

382.0

0.0%

385.8

Agriculture EBITA

13.4

13.6

1.1%

13.5

13.7

1.5%

14.0

14.1

0.6%

14.3

Engineering revenues

46.2

46.5

0.8%

56.4

56.4

0.0%

57.6

57.6

0.0%

58.8

Engineering EBITA

4.6

5.3

15.5%

5.9

6.0

0.8%

6.1

6.2

2.5%

6.4

Group revenues

418.8

403.9

-3.6%

434.6

434.6

0.0%

439.6

439.6

0.0%

444.6

Adjusted PBT

18.1

18.9

4.6%

19.4

19.4

0.0%

20.0

20.0

0.0%

20.4

EPS (p)

15.2

15.6

2.5%

16.4

16.2

-0.9%

16.9

16.8

-0.7%

17.2

DPS(p)

4.7

4.8

1.1%

4.9

4.9

0.0%

5.1

5.1

0.0%

5.3

Net (cash)/debt

27.5

23.8

-13.5%

28.7

29.0

1.0%

23.5

24.5

4.4%

20.0

Source: Edison Investment Research

Valuation

DCF methodology

Exhibit 3: DCF valuation

Discount rate (post-tax, nominal)

9.0%

9.5%

10.0%

10.5%

11.0%

Terminal growth

0.0%

197

185

174

165

156

1.0%

218

203

190

179

168

1.5%

230

214

199

187

175

2.0%

244

226

210

196

183

3.0%

279

256

235

218

202

Source: Edison Investment Research

Our valuation methodology is based on a DCF analysis, supplemented with a comparison of peer group multiples. We continue to use a conservative 10.0% WACC and a 1.0% terminal growth rate for our DCF calculation. This gives a fair value of 190p/share (previously 184p/share). The valuation gap should close once there is clarity on trading arrangements post-Brexit and news of further contracts to replenish the order book for the German robotics business.

Peer-based multiples

Exhibit 4: Peer multiple analysis

Market cap (£m)

EV/EBITDA (x)
August 2020

EV/EBITDA (x)
August 2021

P/E (x)
August 2020

P/E (x)
August 2021

Anpario

77

10.4

9.6

16.7

15.6

BayWa

793

12.8

12.2

16.8

14.8

NWF Group

83

6.1

6.1

11.0

10.8

Origin Enterprises

504

7.1

6.9

8.6

8.4

Ridley Corporation

176

7.3

6.3

15.0

12.2

Wynnstay Group

55

5.5

5.3

7.7

7.4

Mean

8.2

7.7

12.6

11.5

Carr's Group @ 145p/share

133

6.9*

6.8*

8.9

8.6

Carr's Group @ 190p/share

175

8.7*

8.6*

11.7

11.3

Source: Refinitiv estimates, Edison Investment Research. Note: *Excluding JVs. Prices at 7 November 2019.

In Exhibit 4 we compare Carr’s EV/EBITDA and P/E multiples for the years ended August 2020 and August 2021 with calendarised multiples for listed peers in the agricultural sector. At the current share price (145p), on our estimates (which are broadly unchanged since the upward revision made in July following the NW Total acquisition) Carr’s is trading below its peers with regards to the mean EV/EBITDA multiple (6.9x vs 8.2x) and P/E (8.9x vs 12.6x) multiples for the year ending August 2020. At the indicative value of 190p/share derived from our DCF calculation, Carr’s implied EV/EBITDA multiple for the year ending August 2020 is slightly higher than the peer group average (8.7x vs 8.2x), while the P/E multiple is slightly lower (11.7x vs 12.6x).

Exhibit 5: Financial summary

£m

2018

2019

2020e

2021e

2022e

Year-end Aug

PROFIT & LOSS

Revenue

 

 

403.2

403.9

434.6

439.6

444.6

EBITDA

 

 

19.9

22.1

22.8

23.2

23.5

Share of post-tax profits in JVs and associates

3.2

2.7

2.7

2.9

3.0

Operating Profit (before amort. and except.)

 

 

18.6

19.8

20.6

21.2

21.6

Amortisation of acquired intangibles

(0.3)

(0.8)

(0.8)

(0.8)

(0.8)

Exceptionals

(0.8)

(0.9)

0.0

0.0

0.0

Operating Profit

16.4

17.2

18.9

19.5

19.9

Net Interest

(0.9)

(0.9)

(1.2)

(1.2)

(1.2)

3.2

2.7

2.7

2.9

3.0

Profit Before Tax (norm)

 

 

17.7

18.9

19.4

20.0

20.4

Profit Before Tax (FRS 3)

 

 

15.5

16.3

17.7

18.3

18.7

Tax

(1.9)

(2.7)

(2.9)

(3.0)

(3.0)

Profit After Tax (norm)

15.6

15.9

16.5

17.0

17.4

Profit After Tax (FRS 3)

13.6

13.6

14.8

15.3

15.7

Minority interest

(1.8)

(1.6)

(1.6)

(1.6)

(1.6)

Net income (norm)

13.9

14.3

14.9

15.5

15.8

Net income (FRS 3)

11.9

12.0

13.2

13.8

14.1

Average Number of Shares Outstanding (m)

91.4

91.8

91.9

91.9

91.9

EPS - normalised (p)

 

 

15.2

15.6

16.2

16.8

17.2

EPS

 

 

14.8

15.2

15.8

16.4

16.7

EPS - FRS 3 (p)

 

 

13.0

13.1

14.4

15.0

15.3

Dividend per share (p)

4.50

4.75

4.90

5.10

5.30

EBITDA Margin (%)

4.9

5.5

5.2

5.3

5.3

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

4.6

4.9

4.7

4.8

4.9

BALANCE SHEET

Fixed Assets

 

 

96.5

115.6

115.7

115.8

115.9

Intangible Assets

26.5

42.2

42.6

42.9

43.3

Tangible Assets, Deferred tax assets and Pension surplus

70.0

73.4

73.1

72.9

72.6

Current Assets

 

 

134.7

140.7

147.8

150.8

153.8

Stocks

42.4

46.3

52.4

53.0

53.6

Debtors

67.7

65.8

75.0

75.9

76.7

Cash

24.6

28.6

20.4

21.9

23.5

Current Liabilities

 

 

(99.5)

(88.8)

(90.9)

(88.7)

(86.5)

Creditors including tax, social security and provisions

(64.5)

(64.9)

(70.1)

(70.9)

(71.7)

Short term borrowings

(35.0)

(23.9)

(20.9)

(17.9)

(14.9)

Long Term Liabilities

 

 

(10.8)

(36.6)

(36.6)

(36.6)

(36.6)

Long term borrowings

(5.0)

(28.6)

(28.6)

(28.6)

(28.6)

Other long term liabilities

(5.8)

(8.0)

(8.0)

(8.0)

(8.0)

Net Assets

 

 

121.0

131.0

136.0

141.3

146.6

Minority interest

(15.7)

(16.7)

(17.7)

(18.7)

(19.7)

Shareholders’ equity

 

 

105.3

114.3

118.3

122.5

126.9

CASH FLOW

Operating Cash Flow

 

 

15.0

16.0

12.6

22.5

22.8

Net Interest

(1.0)

(1.1)

(1.2)

(1.2)

(1.2)

Tax

(2.5)

(2.3)

(2.9)

(3.0)

(3.0)

Investment activities

(2.8)

(4.2)

(5.8)

(5.8)

(5.8)

Acquisitions/disposals

(4.2)

(10.2)

(3.5)

(3.5)

(3.5)

Equity financing and other financing activities

(0.1)

0.6

0.0

0.0

0.0

Dividends

(3.8)

(4.2)

(4.4)

(4.5)

(4.7)

Net Cash Flow

0.5

(5.4)

(5.2)

4.5

4.5

Opening net debt/(cash)

 

 

14.1

15.4

23.8

29.0

24.5

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

1.7

3.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

15.4

23.8

29.0

24.5

20.0

Source: Company reports, Edison Investment Research


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Australia

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New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

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United States

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

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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

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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