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Improved FY21 expectations

Carr's Group 19 July 2021 Update
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Carr’s Group

Improved FY21 expectations

Trading update

General industrials

19 July 2021

Price

149.5p

Market cap

£140m

Net debt at end February 2021 (£m) (excluding £15.1m finance leases)

10.6

Shares in issue

93.7m

Free float

58.6%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

1.0

6.8

32.3

Rel (local)

3.2

6.9

14.2

52-week high/low

144p

94.8p

Business description

Carr’s Group’s Speciality Agriculture and Agricultural Supplies divisions serve farmers in the North of England, South Wales, the Welsh Borders and Scotland, the United States, Germany, Canada and New Zealand. The Engineering division offers remote handling equipment and fabrications to the global nuclear and oil and gas industries.

Next event

FY21 results

22 November 2021

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

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

Carr’s Group has provided an update for the 20-week period ended 17 July 2021, which notes that FY21 performance is expected to be moderately ahead of management expectations. Strong performances from both the Speciality Agriculture and Agricultural Supplies divisions have continued into H221. The H221 Engineering divisional recovery that management expected has been realised, supported by contracts from the nuclear and defence markets, and rising oil and gas prices. We raise our FY21 adjusted PBT estimate by 4.5%, leaving FY22 and FY23 estimates unchanged.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/19

403.9

18.0

14.6

4.75

10.2

3.2

08/20

395.6

14.9

11.9

4.75

12.6

3.2

08/21e

440.0

16.1

11.6

4.90

12.9

3.3

08/22e

447.0

16.5

13.0

5.10

11.5

3.4

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

Strong performance from agricultural activities

As management had expected at the time of the interims, the buoyant livestock prices which stimulated demand for feed blocks and led to a strong performance from the Speciality Agriculture division in H121 have continued into H221. Together with continued recovery in the animal health business, this resulted in a significant improvement in divisional performance compared with FY20. Similarly, the buoyant milk and livestock prices and an improvement in UK farmer confidence generally as the prospect of a no-deal Brexit disappeared have continued into H221. This has driven an increase in like-for-like retail sales and strong growth in machinery revenues, which more than offset margin pressures on feed in the Agricultural Supplies division, resulting in divisional outperformance compared with management expectations.

Benefit of recovery in oil & gas market

The Engineering division’s performance was adversely affected during H121 by low oil prices that reduced investment in the oil and gas market, which had a negative impact on demand for precision machined parts. However, the second-half recovery indicated by order book at end H121 has materialised. The performance improvement was supported by a recovery in the oil & gas market, and reduced overhead costs resulting from minor restructuring programmes at the end of FY20 and during H121 following the appointment of new CEO Hugh Pelham.

Valuation: Indicative valuation of 165p/share

Our DCF analysis gives an indicative value of 165p/share (previously 170p/share), with the small reduction reflecting higher UK corporation tax rates from April 2023 onwards. We believe that the valuation gap with respect to our indicative valuation and the peer averages should continue to close as the improved order book in Engineering and turnaround programme at one of the Engineering manufacturing businesses converts to improved divisional performance.

Changes to estimates

We make the following changes to our estimates:

We increase FY21 central costs by £1.8m to reflect a change in apportioning costs between operating companies and HQ, and raise EBITA from each of the three operating divisions to balance that out. We raise FY21 group EBITA by £0.6m and Agricultural Supplies revenues by £6.8m to reflect outperformance in this division, supported by strong machinery revenues and higher than expected margins in the retail operations. We note that FY22 Speciality Agriculture EBITA is likely to be lower than FY21 because UK lamb prices are beginning to fall and demand for feed blocks in the US will reduce if the current drought there is prolonged.

We reduce FY21 interest payments slightly to reflect robust working capital management and lower average debt.

We apply a similar reapportionment of costs between the operating divisions and HQ in FY22 and FY23. Management expects that FY22 central costs will be unusually high because of the transfer between CEOs.

We apply an adjustment to FY21 tax to reflect a restatement of deferred tax to 25% and to FY23 tax to reflect the proposed increase in UK corporation tax to 25% from April 2023 onwards.

Exhibit 1: Revisions to estimates

£m

2020

2021e

2022e

2023e

Actual

Old

New

Change

Old

New

Change

Old

New

Change

Speciality Agriculture revenues

61.9

66.8

66.8

0.0%

72.2

72.2

0.0%

76.5

76.5

Agricultural Supplies revenues

280.7

313.2

320.0

2.2%

319.8

319.8

0.0%

322.5

322.5

Total Agriculture revenues

342.6

380.0

386.8

1.8%

392.0

392.0

0.0%

399.0

399.0

0.0%

Engineering revenues

53.0

53.2

53.2

0.0%

55.0

55.0

0.0%

62.0

62.0

0.0%

Group revenues (£m)

395.6

433.2

440.0

1.6%

447.0

447.0

0.0%

461.0

461.0

0.0%

Speciality Agriculture EBITA excluding JVs

6.5

7.1

7.4

4.2%

7.1

7.4

4.2%

7.2

7.9

9.7%

Agricultural Supplies EBITA excluding JVs

4.2

4.3

4.8

11.6%

4.4

4.9

11.4%

4.5

5.0

11.1%

Agriculture JVs EBITA

2.6

2.8

2.8

0.0%

2.8

2.8

0.0%

2.9

2.9

0.0%

Total Agriculture EBITA including JVs

13.4

14.1

15.8

12.1%

14.3

15.1

5.6%

14.6

15.8

8.2%

Engineering EBITA

3.8

4.0

4.7

17.5%

4.2

4.9

16.7%

5.0

5.3

5.0%

Central costs (£m)

(1.0)

(1.7)

(3.5)

-180.0%

(1.0)

(2.5)

-150.0%

(1.1)

(2.5)

-145.0%

Group EBITA after deducting share-based payments (£m)

16.2

16.4

17.0

3.7%

17.5

17.5

0.0%

18.6

18.6

0.0%

Normalised PBT after deducting share-based payments (£m)

14.9

15.4

16.1

4.5%

16.5

16.5

0.0%

17.6

17.6

0.0%

Normalised undiluted EPS after deducting share-based payments (p)

11.9

12.2

11.6

-4.9%

13.0

13.0

-0.2%

14.0

13.7

-1.9%

Dividend per share (p)

4.75

4.9

4.9

0.0%

5.1

5.1

0.0%

5.3

5.3

0.0%

Net debt/(cash) (£m)

32.8

27.8

29.0

4.1%

26.1

26.7

2.2%

20.3

21.1

3.9%

Source: Edison Investment Research

Valuation

DCF methodology

Our valuation methodology is based on a discounted cash flow (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 165p/share (previously 170p/share), with the modest reduction reflecting the impact of higher corporation tax rates from April 2023 onwards. We prefer a DCF analysis to a peer-based multiples approach because it looks beyond any short-term issues of unseasonal weather, to which the group, like other companies engaged in agricultural supply, is exposed. The share price has risen by 9% since the interims in April. We believe the valuation gap should continue to close as the improved order book in Engineering and turnaround programme at one of the Engineering manufacturing businesses converts to improved divisional performance.

Exhibit 2: DCF valuation (p/share) – sensitivities to WACC and terminal growth assumptions

WACC

9.0%

9.5%

10.0%

10.5%

11.0%

Terminal growth

0.0%

170

162

154

148

142

1.0%

184

174

165

157

150

1.5%

193

181

172

163

155

2.0%

202

190

179

169

161

3.0%

226

210

196

184

174

Source: Edison Investment Research

Peer-based multiples

In Exhibit 3 we compare Carr’s prospective EV/EBITDA and P/E multiples with those for its listed peers in the agricultural sector. At the current share price (149.5p), Carr’s is trading below the mean for its peers (excluding Anpario) on all metrics except for FY21 P/E which is distorted by the deferred tax adjustment. In our opinion, this discount is not justified because Carr’s feed block activity in North America, mainland Europe and New Zealand reduces the exposure of its agricultural businesses to challenges caused by the UK climate and government policy. This sets Carr’s apart from both NWF and Wynnstay, whose agricultural activities are confined to the UK. In addition, since a material proportion of operating profit (FY20: 44%) is derived from the Speciality Agriculture division, Carr’s Group merits multiples that are closer to the higher values achieved by natural feed additives provider Anpario than agricultural supply companies like ForFarmers or Origin Enterprises.

Exhibit 3: Peer based multiples

Name

Market cap
(£m)

EV/EBITDA 1FY (x)

EV/EBITDA 2FY (x)

P/E
1FY (x)

P/E
2FY (x)

Anpario

158.9

20.9

20.1

31.2

30.4

ForFarmers

396.9

4.8

4.8

11.4

10.7

NWF Group

106.9

6.8

6.8

12.0

12.4

Origin Enterprises

374.0

8.6

8.1

9.6

8.8

Ridley Corporation

190.5

7.3

7.0

16.4

13.8

Wynnstay Group

110.8

8.5

8.3

15.1

14.6

Mean excluding Anpario

7.2

7.0

12.9

12.0

Mean including Anpario

9.5

9.2

16.0

15.1

Carr's Group @ 149.5p/share

140.1

6.6

6.4

12.9

11.5

Carr's Group @ 165p/share

154.6

7.2

7.0

14.3

12.7

Source: Edison Investment Research, Refinitiv. Note: Prices as at 15 July 2021

At the indicative value of 165p/share derived from our DCF calculation, Carr’s would be trading in line with the average for its peers, excluding Anpario, except for FY21 P/E which is distorted by the deferred tax adjustment. It would be trading at a discount on all metrics if Anpario was included in the mean calculation.

Exhibit 4: Financial summary

£m

2019

2020

2021e

2022e

2023e

31-August

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

403.9

395.6

440.0

447.0

461.0

EBITDA

 

 

23.8

23.4

24.2

24.7

25.7

Operating Profit (before amor. and except.)

 

18.9

16.2

17.0

17.5

18.6

Amortisation of acquired intangibles

(0.8)

(1.4)

(1.3)

(1.3)

(1.3)

Exceptionals

(0.9)

(1.0)

(0.2)

0.0

0.0

Share of post-tax profit from JVs and associate

2.7

2.6

2.8

2.8

2.9

Reported operating profit

17.2

13.8

15.5

16.2

17.3

Net Interest

(0.9)

(1.3)

(0.9)

(1.0)

(1.0)

Profit Before Tax (norm)

 

 

18.0

14.9

16.1

16.5

17.6

Profit Before Tax (reported)

 

 

16.3

12.5

14.6

15.2

16.3

Reported tax

(2.7)

(1.6)

(3.8)

(2.7)

(3.1)

Profit After Tax (norm)

15.1

13.3

12.3

13.8

14.4

Profit After Tax (reported)

13.6

10.9

10.8

12.5

13.1

Minority interests

(1.6)

(1.4)

(1.6)

(1.6)

(1.6)

Net income (normalised)

13.4

11.0

10.8

12.2

12.8

Net income (reported)

12.0

9.5

9.3

10.9

11.5

Average number of shares outstanding (m)

91.8

92.3

93.1

93.7

93.7

EPS - normalised (p)

 

 

14.6

11.9

11.6

13.0

13.7

EPS - normalised fully diluted (p)

 

 

14.2

11.8

11.4

12.7

13.3

EPS - basic reported (p)

 

 

13.1

10.3

10.0

11.6

12.3

Dividend (p)

4.75

4.75

4.90

5.10

5.25

EBITDA Margin (%)

5.9

5.9

5.5

5.5

5.6

Normalised Operating Margin

4.7

4.1

3.9

3.9

4.0

BALANCE SHEET

Fixed Assets

 

 

115.6

127.5

129.5

126.8

124.2

Intangible Assets

42.2

41.2

41.2

41.1

41.0

Tangible Assets

41.9

53.1

55.1

52.5

50.0

Investments & other

31.5

33.1

33.1

33.1

33.1

Current Assets

 

 

140.7

119.9

127.1

128.1

137.1

Stocks

46.3

41.0

44.6

45.3

46.7

Debtors

65.8

59.8

62.7

63.7

65.7

Cash & cash equivalents

28.6

17.6

18.2

17.6

23.1

Other

0.0

1.5

1.5

1.5

1.5

Current Liabilities

 

 

(88.8)

(70.8)

(79.9)

(76.8)

(77.7)

Creditors

(63.9)

(56.6)

(68.7)

(68.6)

(69.5)

Tax and social security

(1.0)

(0.0)

(0.0)

(0.0)

(0.0)

Short term borrowings*

(23.9)

(14.2)

(11.2)

(8.2)

(8.2)

Other

0.0

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(36.6)

(42.4)

(42.4)

(42.4)

(42.4)

Long term borrowings*

(28.6)

(36.2)

(36.2)

(36.2)

(36.2)

Other long-term liabilities

(8.0)

(6.2)

(6.2)

(6.2)

(6.2)

Net Assets

 

 

131.0

134.2

134.2

135.7

141.2

Minority interests

(16.7)

(17.0)

(18.6)

(20.2)

(21.8)

Shareholders' equity

 

 

114.3

117.1

115.6

115.5

119.4

CASH FLOW

Op Cash Flow before WC and tax

23.8

23.4

24.2

24.7

25.7

Working capital

(5.0)

5.2

5.6

(1.8)

(2.5)

Exceptional & other

(2.8)

(6.0)

(2.8)

(2.8)

(2.9)

Tax

(2.3)

(3.1)

(3.8)

(2.7)

(3.1)

Operating cash flow

 

 

13.7

19.6

23.2

17.3

17.1

Investment activities

(4.2)

(7.6)

(10.5)

(5.8)

(5.8)

Acquisitions/disposals

(10.2)

(2.7)

(3.5)

(3.5)

0.0

Net interest

(1.1)

(1.5)

(0.9)

(1.0)

(1.0)

Equity financing

0.0

0.0

0.0

0.0

0.0

Dividends

(4.2)

(3.3)

(4.5)

(4.6)

(4.8)

Other

(0.6)

0.8

0.0

0.0

0.0

Net Cash Flow

(6.6)

5.2

3.9

2.3

5.5

Opening net debt/(cash)*

 

 

15.4

23.8

32.8

29.0

26.7

FX

0.0

0.0

0.0

0.0

0.0

Other non-cash movements

(1.9)

(14.3)

0.0

0.0

0.0

Closing net debt/(cash)*

 

 

23.8

32.8

29.0

26.7

21.1

Source: Company accounts, Edison Investment Research. Note: *Including IFRS16 leases.


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This report has been commissioned by Carr’s Group and prepared and issued by Edison, in consideration of a fee payable by Carr’s Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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General disclaimer and copyright

This report has been commissioned by Carr’s Group and prepared and issued by Edison, in consideration of a fee payable by Carr’s Group. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

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

1185 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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