Recovery continues

Carr's Group 16 April 2018 Update
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Carr's Group

Recovery continues

Interim results

Basic materials

16 April 2018

Price

137.25p

Market cap

£125m

Net debt (£m) at 3 March 2018

16.1

Shares in issue

91.4m

Free float

84.5%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

6.8

(2.0)

(1.0)

Rel (local)

5.4

4.6

(0.7)

52-week high/low

149.8p

120.0p

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 Engineering division offers remote handling equipment and fabrications to the global nuclear and oil and gas industries.

Next events

Ex-dividend date

26 April 2018

Interim dividend payable

31 May 2018

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

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

The recovery in both US feed block sales and the UK manufacturing businesses noted at Carr’s Group’s AGM in January has continued throughout H118. This has resulted in a 22% improvement in adjusted PBT year-on-year and a slight over-performance compared with management’s expectations. H218 has started well, so we raise our estimates and adjust our indicative valuation from 167p/share to 169p/share.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

8/16

314.9

14.2

10.8

3.8**

12.7

2.8

8/17

346.2

11.9

9.4

4.0

14.6

2.9

8/18e

375.1

16.2

12.8

4.3

10.7

3.1

8/19e

382.5

16.9

12.9

4.5

10.6

3.3

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excluding 17.54p special dividend.

Improved performance in both divisions

The positive trends noted at the AGM in January continued for the remainder of H118. Group revenues rose by 13.2% year-on-year to £200.1m. This reflected a recovery in the US feed block activity linked to an improvement in cattle prices and in the UK manufacturing businesses, as work progressed on the major contract that had been delayed right until the end of FY17. In addition, sentiment in the UK farming sector continued to be positive and the remote handling businesses benefited from strong order books relating to the global nuclear industry. Pre-exceptional PBT grew by 22.0% to £10.9m. The integration of NuVision, the US engineering company acquired in August 2017, is progressing well.

FY18 performance likely to be ahead of expectations

H118 operating profit was slightly ahead of management expectations because of the level of demand for agricultural inputs in the UK. In addition, the strengthened management at the UK precision machining business enabled it to take advantage of the improved sentiment in the oil and gas industry. H218 has started well. Prices currently paid to UK farmers for livestock and milk are supporting demand for feed, feed blocks, machinery and other agricultural inputs. Engineering performance is underpinned by long-term contracts from the global nuclear industry. We raise our estimates slightly to reflect these positive developments.

Valuation: Uplift as recovery continues

Our updated DCF analysis gives an indicative value of 169p/share (previously 167p). At the current share price, Carr’s is trading below its peers with regards to mean EV/EBITDA (7.4x vs 8.7x) and mean P/E (10.7x vs 12.9x) for the year ending August 2018. Continued recovery in the US feed block market and further confirmation of the Engineering upturn should help close the valuation gap.

Divisional analysis of H118 results

Exhibit 1: Divisional analysis

Year-ended 31 August (£m)

FY16

H117

FY17

FY18e

FY19e

FY20e

Agriculture revenues

284.8

160.5

315.9

329.9

336.4

341.4

Engineering revenues

30.1

16.2

30.4

45.2

46.2

47.3

Group revenues

314.9

176.8

346.2

375.1

382.5

388.7

Previous estimates

370.1

377.5

383.7

Agriculture EBITA – excluding JVs and associates

10.4

7.3

8.6

9.6

9.8

10.1

Engineering EBITA

2.6

0.3

0.7

4.3

4.8

5.2

Reported group EBITA

13.0

7.6

9.3

13.9

14.6

15.3

Previous estimates

13.6

14.6

15.3

Share of profits of JVs and associates

2.1

1.7

2.8

2.8

2.8

2.8

Source: Company data, Edison Investment Research

Agriculture (£178.3m revenues, £9.9m operating profit)

As flagged at the AGM in January, UK farming sentiment remains positive, helping to drive a 6.3% increase in feed volumes, an 8.9% rise in machinery sales, a 9.3% uplift in feed block volumes, and 3.5% like-for-like sales growth in the country stores. The acquisition of Pearson Farm Supplies in October 2017 helped to drive a total increase in country store sales of 15.7%, as well as contributing to the higher feed volumes. While fuel volumes were adversely affected by the mild and wet weather at the start of the period, this was more than offset by the colder weather towards the end of the period, resulting in a 5.6% y-o-y improvement in volumes. As noted at the AGM, US feed block volumes continued to recover as cattle prices for producers improved. Management reported an 11.0% y-o-y increase in volumes sold in the region. A favourable environment for dairy producers in Germany supported a 21.6% rise in feed block volumes from the German joint venture. Divisional revenues increased by 11.1% y-o-y, and EBIT by 9.9% in H118.

Looking forward, management expects sentiment in the UK Agriculture sector and demand for feed blocks in the US and Germany to continue to be positive. The favourable trend in the US will be augmented by the availability of low moisture feed blocks from the low moisture feed block plant in Tennessee. This was commissioned in January 2018, which is towards the end of the season of high demand, so most of the impact will be seen in FY19. The new plant opens up the market in the eastern states of the US. Feed block sales in New Zealand should benefit from the recent formation of a direct sales operation in the region, rather than relying on a distribution partner as previously. Plans to develop the South American market are proceeding as per management’s timeline, with trials at research institutes in Brazil continuing to make good progress.

Engineering (£21.9m revenues, £1.4m EBIT)

Work continued throughout H118 on the significant fabrication contract that was delayed until almost the end of FY17. The design phase is now nearing completion as the project moves towards the main manufacturing phase. The precision engineering business is benefiting from a recovery and stabilisation of the oil price, which happily coincides with a strengthened management team, resulting in more effective business development and improved operating efficiencies. The UK manufacturing business’s performance was consequently significantly ahead of the prior year and slightly ahead of management’s expectations for the period. The remote handling businesses performed well as it too worked through a strong order book, completing the substantial orders from China that were won last year. The integration of NuVision, acquired in August 2017, is progressing as planned. The business performed slightly ahead of the board’s expectations during the period. Divisional revenues increased by 34.1% y-o-y, while EBIT more than trebled in H118.

The strength of the divisional order book, which is based on long-term contracts from the nuclear industry, indicates that these favourable trends are set to continue for the rest of the year. The extension of the German premises, scheduled for completion later this calendar year, will provide additional capacity. Management remains confident of developing sales of Wälischmiller equipment in the US through existing NuVision channels.

Group performance

P&L

Group H118 revenues rose by 13.2% year-on-year to £200.1m, reflecting a recovery in the US feed block and UK manufacturing businesses, a continuation of positive sentiment in the UK agriculture sector and strong order books for the remote handling businesses. Pre-exceptional PBT grew by 22.0% to £10.9m. An interim dividend payment of 1.075p/share (0.95p/share H117) has been declared. (Note: the group pays two interim dividends each year.)

Cash flow and balance sheet

Net debt rose by £2.0m during the period to £16.1m. This is primarily attributable to a £5.0m increase in working capital requirements, which is the typical seasonal pattern; £1.8m capex, which was primarily for the Wälischmiller expansion; £1.6m payable for acquisitions of which £1.2m was the initial consideration for Pearson Farm supplies and £2.8m dividend payments. The retirement benefit surplus increased from £5.2m at end FY17 to £6.0m at end H118. The group no longer makes deficit reduction contributions since the pension scheme was fully funded at the last full actuarial valuation.

Estimates

We revise our estimates slightly to reflect:

higher commodity prices;

strong demand for agricultural inputs in the UK

outperformance of the UK precision machining activity as the strengthened management team was able to take advantage of improved sentiment in the oil and gas sector; and

the level of increase of the first interim dividend payment.

Exhibit 2: Revisions to estimates

FY17

FY18e

FY19e

FY20e

(£m)

Actual

Old

New

Old

New

Old

New

Agriculture revenues

315.9

324.9

329.9

1.6%

331.4

336.4

1.5%

336.3

341.4

1.5%

Agriculture EBITA

11.4

12.2

12.4

1.6%

12.6

12.6

0.0%

12.9

12.9

0.0%

Engineering revenues

30.4

45.2

45.2

0.0%

46.2

46.2

0.0%

47.3

47.3

0.0%

Engineering EBITA

0.7

4.2

4.3

2.4%

4.8

4.8

0.0%

5.2

5.2

0.0%

Group revenues

346.2

370.1

375.1

1.4%

377.5

382.5

1.3%

383.7

388.7

1.3%

Adjusted PBT

11.9

15.9

16.2

1.9%

16.9

16.9

0.0%

17.6

17.6

0.0%

EPS (p)

9.4

12.5

12.8

2.0%

12.9

12.9

0.0%

13.5

13.5

0.0%

DPS (p)

4.0

4.2

4.3

2.4%

4.4

4.5

2.3%

4.6

4.7

2.2%

Net (cash)/debt

14.1

14.9

14.7

(1.5%)

10.9

10.7

(1.3%)

5.9

5.8

(0.8%)

Source: Edison Investment Research, company data

Valuation

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. Following the small upwards revision to our estimates, this gives a fair value of 169p/share (previously 167p/share).

Exhibit 3: DCF calculation (p/share)

Discount rate (post-tax, nominal)

9.0%

9.5%

10.0%

10.5%

11.0%

Terminal growth

0.0%

175

165

156

148

141

1.0%

192

180

169

160

151

1.5%

202

188

177

166

157

2.0%

213

198

185

174

163

3.0%

242

223

206

192

179

Source: Edison Investment Research

A comparison of Carr’s EV/EBITDA and P/E multiples for the years ended August 2018 and August 2019 with calendarised multiples for listed peers in the agricultural sector is shown in Exhibit 4. At the current share price (137.25p), on our estimates Carr’s is trading below its peers with regards to mean EV/EBITDA (7.4x vs 8.7x) and mean P/E (10.7x vs 12.9x) for the year ending August 2018. The discount to the average peer multiples should close as feed block demand continues to recover in the US and there is further confirmation of the recovery in the Engineering division. This is underpinned by the 2018 Engineering order book, which is based on long-term contracts in the nuclear industry. At the indicative value of 169p/share derived from our DCF calculation, Carr’s implied EV/EBITDA multiple for the year ending August 2018 is broadly in line with the peer group average (8.9x vs 8.7x), as is the P/E multiple (13.2x vs 12.9x).

Exhibit 4: Peer multiple analysis

Name

Market cap ($m)

EV/EBITDA (x)

August 2018 

EV/EBITDA (x)

August 2019 

P/E (x)

August 2018

P/E (x)

August 2019

Carr's Group at 138p/share

179

7.4

7.1

10.8

10.7

Carr's Group at 169p/share

209

8.9

8.5

13.2

13.1

BayWa-Bayerische Warenvermit

1,246

10.7

9.9

12.4

10.0

NWF Group

129

7.7

7.5

13.2

12.7

Origin Enterprises

803

10.2

9.7

10.8

10.2

Ridley Corp

308

7.8

7.2

15.3

13.9

Wynnstay Group

118

7.3

7.0

12.6

12.3

Mean

8.7

8.3

12.9

11.8

Source: Bloomberg, Edison Investment Research. Note: prices at 12 April 2018.

Exhibit 5: Financial summary

£m

2016

2017

2018e

2019e

2020e

Year-end August

PROFIT & LOSS

Revenue

314.9

346.2

375.1

382.5

388.7

EBITDA

16.5

13.9

19.0

19.8

20.6

Operating Profit (before amort. and except).

12.9

9.8

14.4

15.1

15.8

Amortisation of acquired intangibles

(0.2)

(0.1)

(0.5)

(0.5)

(0.5)

Share-based payments

0.1

(0.5)

(0.5)

(0.5)

(0.5)

Exceptionals

0.0

(1.3)

0.0

0.0

0.0

Operating Profit

12.8

7.9

13.4

14.1

14.8

Net Interest

(0.8)

(0.7)

(1.0)

(1.0)

(1.0)

Share of post-tax profits in JVs and associates

2.1

2.8

2.8

2.8

2.8

Profit Before Tax (norm)

14.2

11.9

16.2

16.9

17.6

Profit Before Tax (FRS 3)

14.1

10.0

15.2

15.9

16.6

Tax

(2.9)

(1.7)

(3.2)

(3.8)

(4.0)

Profit After Tax (norm)

11.2

9.9

13.0

13.1

13.6

Profit After Tax (FRS 3)

11.2

8.3

12.0

12.1

12.6

Post tax profit (loss) relating to discontinued operations

2.8

0.0

0.0

0.0

0.0

Minority interest

(1.5)

(1.3)

(1.3)

(1.3)

(1.3)

Net income (norm)

9.7

8.6

11.7

11.8

12.3

Net income (FRS 3)

12.5

7.0

10.7

10.8

11.3

Average Number of Shares Outstanding (m)

90.1

91.4

91.4

91.4

91.4

EPS - normalised (p)

10.8

9.4

12.8

12.9

13.5

EPS - normalised

10.4

9.4

12.7

12.8

13.4

EPS - FRS 3 (p)

13.8

7.7

11.7

11.8

12.4

Dividend per share (p)

3.8*

4.0

4.3

4.5

4.7

EBITDA Margin (%)

5.2

4.0

5.1

5.2

5.3

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

4.1

2.8

3.8

3.9

4.1

BALANCE SHEET

Fixed Assets

63.1

87.9

86.6

85.2

83.6

Intangible Assets

11.7

26.5

26.4

26.2

26.1

Tangible Assets, Deferred tax assets and Pension surplus

51.4

61.4

60.2

58.9

57.5

Current Assets

139.1

121.1

122.4

124.8

127.7

Stocks

33.4

37.0

38.5

39.0

39.5

Debtors

57.2

60.2

63.5

64.5

65.0

Cash

48.4

23.9

20.4

21.3

23.2

Current Liabilities

(69.0)

(73.7)

(71.7)

(69.2)

(66.7)

Creditors including tax, social security and provisions

(47.3)

(56.7)

(57.7)

(58.2)

(58.7)

Short term borrowings

(21.6)

(17.1)

(14.1)

(11.1)

(8.1)

Long Term Liabilities

(23.1)

(29.4)

(29.4)

(29.4)

(29.4)

Long term borrowings

(18.6)

(21.0)

(21.0)

(21.0)

(21.0)

Retirement benefit obligation

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(4.5)

(8.4)

(8.4)

(8.4)

(8.4)

Net Assets

110.1

105.9

107.8

111.4

115.2

Minority interest

(13.4)

(14.4)

(15.4)

(16.4)

(17.4)

Shareholders’ equity

96.7

91.5

92.4

94.9

97.8

CASH FLOW

Operating Cash Flow

11.7

15.1

15.2

18.8

20.1

Net Interest

(0.5)

(0.7)

(1.0)

(1.0)

(1.0)

Tax

(1.1)

(1.2)

(3.2)

(3.8)

(4.0)

Investment activities

(2.9)

(1.1)

(3.8)

(3.8)

(3.8)

Acquisitions/disposals

22.7

(13.2)

(4.1)

(2.3)

(2.3)

Equity financing and other financing activities

1.0

0.1

0.0

0.0

0.0

Dividends

(3.3)

(19.5)

(3.7)

(3.9)

(4.1)

Net Cash Flow

27.5

(20.4)

(0.5)

3.9

4.9

Opening net debt/(cash)

24.4

(8.1)

14.1

14.7

10.7

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

(5.1)

1.9

0.0

0.0

0.0

Closing net debt/(cash)

(8.1)

14.1

14.7

10.7

5.8

Source: Edison Investment Research, Carr’s Group accounts. Note: *excluding 17.54p special dividend.

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

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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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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