Recovery in both divisions confirmed

Carr's Group 12 November 2018 Update
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Carr's Group

Recovery in both divisions confirmed

FY18 results

General industrials

 

12 November 2018

Price

156p

Market cap

£143m

Net debt (£m) end August 2018

15.4

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

5.1

3.5

8.7

Rel (local)

7.1

12.7

14.5

52-week high/low

165p

120p

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 event

AGM

8 January 2019

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

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

The FY18 results for Carr’s Group show that it has delivered the promised recovery in both divisions. This is the result of (1) market conditions which have boosted demand for feed blocks in the US and a wide range of agricultural inputs in the UK; and (2) prior year investment, for example in feed block production capacity and in acquisitions. Noting that the FY18 performance was ahead of our estimates, we revise our FY19 and FY20 forecasts upwards and raise our indicative valuation by 4p/share to 182p/share.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

08/17

346.2

11.9

9.4

4.0

16.6

2.6

08/18

403.2

17.7

15.2

4.5

10.3

2.9

08/19e

418.8

18.1

15.3

4.7

10.2

3.0

08/20e

425.5

18.9

16.0

4.9

9.8

3.1

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

Record profits

Group FY18 revenues rose by 16.5% year-on-year to £403.2m, 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. This was ahead of our £377.4m estimates, reflecting commodity price inflation and a stronger than expected recovery in demand for US feed blocks. Adjusted pre-exceptional PBT grew by 48.8% to £17.7m, also ahead of our estimate (£16.6m), because of the stronger than expected performance in Agriculture, especially in the US. The dividend was raised by 0.5p to 4.5p/share, ahead of our 4.3p/share estimate.

Further progress expected

We expect these positive growth trends to continue. The UK agriculture industry remains positive and there is still potential for growth in the US following the opening of a new feed block facility earlier this year. The acquisition of Animax, with its complementary animal health products, should provide an additional boost. The Engineering order book is strong and recent sales of remote handling equipment from the German business through NuVision’s sales contacts in the US augur well.

Valuation: Uplift as recovery continues

Our updated DCF analysis gives an indicative value of 182p/share (previously 178p). At the current share price, Carr’s is trading below its peers with regards to mean EV/EBITDA (10.5x vs 8.3x) and mean P/E (10.2x vs 13.2x) for the year ending August 2019e. Further confirmation of sustained recovery in both the US feed block market and Engineering should help close the valuation gap.

Divisional analysis of FY18 results

Exhibit 1: Divisional analysis

Year end 31 August (£m)

FY17*

FY18

FY19e

FY20e

FY20e

Agriculture revenues

315.9

359.6

372.6

378.2

382.0

Engineering revenues

30.4

43.6

46.2

47.3

48.5

Group revenues

346.2

403.2

418.8

425.5

430.5

Agriculture EBITA – excluding JVs and associates

8.6

10.0

10.4

10.7

11.0

Engineering EBITA

0.7

4.3**

4.6

5.0

5.2

Reported group EBITA

9.3

14.2

15.1

15.7

16.2

Share of profits of JVs and associates

2.8

3.2

3.0

3.0

3.0

Source: Company data, Edison Investment Research *Restated **Excluding £0.2m loss attributable to JV

Agriculture (£359.6m revenues, £13.4m EBITA)

As flagged at the AGM and the interims, UK farming sentiment remains positive, helping to drive a 8.7% increase in feed volumes, a 7.8% rise in machinery sales, an 8.9% uplift in feed block volumes and a 4.4% 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 12.1%, as well as contributing to the higher feed volumes. While fuel volumes benefited from the late spring, this was in part offset by lower on-farm demand during the dry summer resulting in a 4.6% y-o-y improvement in volumes. As noted at the AGM, US feed block volumes continued to recover as cattle prices for producers improved. In addition, a drive to improve sales during the summer from the sale of products such as those designed to reduce hornfly larvae infestation in cattle was successful. Management reported a 17.7% y-o-y increase in volumes sold in North America. The German joint venture noted a 12.4% rise in feed block volumes resulting from the favourable environment for dairy producers in the region. Divisional revenues increased by 13.8% y-o-y, and EBITA by 16.9% in FY18.

Looking forward, management expects sentiment in the UK Agriculture sector and demand for feed blocks in the US and Germany to remain positive. The favourable trend in the US will be augmented by the availability of low-moisture feed blocks from the new plant in Tennessee which gives access to new geographic markets. This was commissioned in January 2018, which is towards the end of the season of high demand, so the full impact will be felt 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 formation of a direct sales operation in the region which has already secured supply agreements with several domestic agricultural merchants, rather than relying on a distribution partner as previously. Plans to develop the South American market are proceeding as per management’s timeline. The group started to supply product to distributors during FY18 and made its first commercial sales in the region, albeit at low levels. Trials at research institutes in Brazil continue to make good progress. Since it is not reasonable to expect a repeat of the drought experienced this summer in the UK and unusually high demand for feed because of the lack of forage, we model a small y-o-y drop in total JV profits during FY19.

Divisional performance will also benefit from the acquisition of Animax in September 2018 for a total cash consideration of up to £8.5m. The transaction broadens the group’s existing range of animal health products and supplements, enabling farmers to administer trace elements via boluses rather than licks. Together with sister company Clinimax, a manufacturer of patented specialist disinfectant products for the medical industry, Animax generated £0.6m EBITDA for the year ended November 2017. Management expects that the transaction will be earnings enhancing in FY19.

Engineering (£43.6m revenues, £4.1m EBITA)

Work continued throughout FY18 on the significant fabrication contract that was delayed until almost the end of FY17. 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’ performance was consequently significantly ahead of the prior year. 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 well. NuVision generated £5.7m sales during FY18 (£0.2m in FY17), worked with the UK manufacturing business on the major contract referred to above, was instrumental in helping Wälischmiller secure several contracts in the US and won two significant Mechanical Stress Improvement Process (MSIP) contracts. Divisional revenues increased by 43.6% y-o-y, while EBITA increased sixfold.

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 during FY19. The extension of the German premises, which is now complete, provides additional capacity. Management remains confident of securing further sales of Wälischmiller equipment through NuVision’s sales channels.

Group performance
P&L

Group FY18 revenues rose by 16.5% year-on-year to £403,2m, 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. This was ahead of our £377.4m estimates, reflecting commodity price inflation and a stronger than expected recovery in demand for US feed blocks. Adjusted pre-exceptional PBT grew by 48.8% to £17.7m, also ahead of our estimate (£16.6m), because of the stronger than expected performance in Agriculture, especially in the US. Outperformance here is also attributable to higher than expected share-based payment charges (£1.1m actual vs £0.5m estimate), as this is stripped out as part of our adjustments. The dividend was raised by 0.5p to 4.5p/share, ahead of our 4.3p/share estimate.

Cash flow and balance sheet

Net debt rose by £1.2m during FY18 to £15.4m at end August 2018. This is primarily attributable to a £4.7m increase in working capital requirements; £4.5m capex, half of which was for the Wälischmiller expansion; £4.2m payable for acquisitions including the initial consideration for Pearson Farm supplies and the deferred consideration for Staber; and £3.8m in dividend payments to shareholders. The increase in working capital is due to 1) commodity price inflation; and 2) the decision to build up stock levels of certain third-party products ahead of price increases. The retirement benefit surplus increased from £5.2m at end FY17 to £10.1m at end FY18. The group no longer makes deficit reduction contributions since the pension scheme was fully funded at the last full actuarial valuation.

Estimates

We have revised our estimates to reflect:

Commodity price inflation, resulting in higher Agriculture revenues throughout the forecast period and higher levels of working capital

Faster than expected recovery in the US feed block market during FY18.

Lower than expected improvement in Engineering EBITA (after deducting share-based payments) during FY18. We note that this reflects higher than expected share-based payments rather than any operating issues.

Higher than expected DPS payment in FY18

Higher than expected share-based payment charges in FY18 so FY19 and FY20 charges both increased from £0.5m to £1.1m.

These changes are summarised in Exhibit 2. We also present FY21 estimates for the first time.

Exhibit 2: Changes to estimates

Year end August

FY18

FY19e

FY20e

FY21e

(£m)

Old

Actual

% change

Old

New

% change

Old

New

% change

New

Agriculture revenues

331.7

359.6

8.4%

344.1

372.6

8.3%

349.3

378.2

8.3%

382.0

Agriculture EBITA

12.7

13.4

5.3%

13.2

13.5

2.1%

13.5

13.7

1.8%

14.0

Engineering revenues

45.7

43.6

(4.6%)

46.2

46.2

0.0%

47.3

47.3

0.0%

48.5

Engineering EBITA

4.4

4.1

(7.1%)

4.8

4.6

(3.7%)

5.2

5.0

(3.8%)

5.2

Group revenues

377.4

403.2

6.8%

390.3

418.8

7.3%

396.6

425.5

7.3%

430.5

Adjusted PBT

16.6

17.7

6.5%

17.2

18.1

5.4%

18.2

18.9

3.6%

19.3

EPS (p)

13.1

15.2

15.6%

13.6

15.3

12.3%

14.5

16.0

10.4%

16.4

DPS(p)

4.3

4.5

4.7%

4.5

4.7

4.4%

4.7

4.9

4.3%

5.1

Net (cash)/debt

14.4

15.4

7.0%

15.1

21.5

42.4%

9.3

20.7

122.7%

14.8

Source: Carr’s Group, Edison Investment Research

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 182p/share (previously 178p/share).

Exhibit 3: DCF calculation (p/share)

Discount rate (post-tax, nominal)

187

9.0%

9.5%

10.0%

10.5%

11.0%

Terminal growth

0.0%

189

178

168

159

151

1.0%

208

194

182

172

162

1.5%

219

204

191

179

169

2.0%

232

215

201

188

176

3.0%

264

243

224

208

194

Source: Edison Investment Research

In Exhibit 4 we compare Carr’s EV/EBITDA and P/E multiples for the years ended August 2019 and August 2020 with calendarised multiples for listed peers in the agricultural sector. At the current share price (156p), on our estimates Carr’s is trading below its peers with regards to all mean EV/EBITDA (10.5x vs 8.3x) and P/E (10.2x vs 13.2x) multiples for the year ending August 2019. 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 sustained recovery in the Engineering division. At the indicative value of 182p/share derived from our DCF calculation, Carr’s implied EV/EBITDA multiple for the year ending August 2019 is slightly below the peer group average (7.6x vs 8.3x), as is the P/E multiple (11.9x vs 13.2x).

Exhibit 4: Peer multiple analysis

Company name

Market cap ($m)

EV/EBITDA (x) August 2019

EV/EBITDA (x) August 2020

P/E (x) August 2019

P/E (x) August 2020

BayWa AG

974

10.4

9.7

14.5

11.6

NWF Group PLC

84

6.4

6.3

12.0

11.5

Origin Enterprises PLC

743

9.0

8.7

11.5

11.1

Ridley Corporation Ltd

448

8.2

7.7

16.6

16.5

Wynnstay Group PLC

83

7.3

7.2

11.3

11.1

Mean

8.3

7.9

13.2

12.4

Carr's Group at 145p/share

172

6.2*

6.0*

9.5

9.1

Carr's Group at 182p/share

216

7.6*

7.4*

11.9

11.4

Source: I/B/E/S estimates, Edison Investment Research. Note: *Including JVs. Prices at 7 November 2018.

Exhibit 5: Financial summary

£m

2017

2018

2019e

2020e

2021e

Year-end Aug

Restated

PROFIT & LOSS

Revenue

 

 

346.2

403.2

418.8

425.5

430.5

EBITDA

 

 

13.9

19.9

21.0

21.5

22.0

Operating Profit (before amort. and except.)

 

 

9.8

15.4

16.4

16.8

17.3

Amortisation of acquired intangibles

(0.1)

(0.3)

(0.2)

(0.2)

(0.2)

Share-based payments

(0.5)

(1.1)

(1.1)

(1.1)

(1.1)

Exceptionals

(1.3)

(0.8)

(0.2)

0.0

0.0

Operating Profit

7.9

13.2

14.9

15.5

16.0

Net Interest

(0.7)

(0.9)

(1.3)

(1.0)

(1.0)

Share of post-tax profits in JVs and associates

2.8

3.2

3.0

3.0

3.0

Profit Before Tax (norm)

 

 

11.9

17.7

18.1

18.9

19.3

Profit Before Tax (FRS 3)

 

 

10.0

15.5

16.6

17.6

18.0

Tax

(1.7)

(1.9)

(2.6)

(2.8)

(2.9)

Profit After Tax (norm)

9.9

15.6

15.5

16.1

16.5

Profit After Tax (FRS 3)

8.3

13.6

14.0

14.8

15.2

Minority interest

(1.3)

(1.8)

(1.5)

(1.5)

(1.5)

Net income (norm)

8.6

13.9

14.0

14.6

15.0

Net income (FRS 3)

7.0

11.9

12.5

13.3

13.7

Average Number of Shares Outstanding (m)

91.4

91.4

91.4

91.4

91.4

EPS - normalised (p)

 

 

9.4

15.2

15.3

16.0

16.4

EPS

 

 

9.4

14.8

15.0

15.6

16.0

EPS - FRS 3 (p)

 

 

7.7

13.0

13.6

14.5

15.0

Dividend per share (p)

4.0

4.5

4.7

4.9

5.1

EBITDA Margin (%)

4.0

4.9

5.0

5.0

5.1

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

2.8

3.8

3.9

4.0

4.0

BALANCE SHEET

Fixed Assets

 

 

87.6

96.5

101.9

101.8

101.7

Intangible Assets

26.6

26.5

27.0

27.1

27.3

Tangible Assets, Deferred tax assets and Pension surplus

61.1

70.0

74.9

74.7

74.4

Current Assets

 

 

120.9

134.7

133.9

138.2

142.6

Stocks

37.0

42.4

47.0

51.3

51.9

Debtors

60.0

67.7

71.3

73.6

74.5

Cash

23.9

24.6

15.5

13.3

16.2

Current Liabilities

 

 

(73.9)

(99.5)

(83.7)

(81.8)

(79.6)

Creditors including tax, social security and provisions

(56.9)

(64.5)

(66.7)

(67.8)

(68.6)

Short term borrowings

(17.1)

(35.0)

(17.0)

(14.0)

(11.0)

Long Term Liabilities

 

 

(28.7)

(10.8)

(25.8)

(25.8)

(25.8)

Long term borrowings

(21.0)

(5.0)

(20.0)

(20.0)

(20.0)

Retirement benefit obligation

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(7.8)

(5.8)

(5.8)

(5.8)

(5.8)

Net Assets

 

 

105.9

121.0

126.3

132.5

138.9

Minority interest

(14.4)

(15.7)

(16.7)

(17.7)

(18.7)

Shareholders equity

 

 

91.5

105.3

109.6

114.8

120.2

CASH FLOW

Operating Cash Flow

 

 

15.1

15.0

14.9

16.0

21.4

Net Interest

(0.7)

(1.0)

(1.3)

(1.0)

(1.0)

Tax

(1.2)

(2.5)

(2.6)

(2.8)

(2.9)

Investment activities

(1.1)

(2.8)

(5.3)

(4.8)

(4.8)

Acquisitions/disposals

(13.2)

(4.2)

(8.8)

(2.3)

(2.3)

Equity financing and other financing activities

0.1

(0.1)

0.0

0.0

0.0

Dividends to shareholders

(19.5)

(3.8)

(4.1)

(4.3)

(4.5)

Net Cash Flow

(20.4)

0.5

(7.3)

0.8

5.9

Opening net debt/(cash)

 

 

(8.1)

14.1

15.4

21.5

20.7

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

1.9

1.7

(1.2)

0.0

0.0

Closing net debt/(cash)

 

 

14.1

15.4

21.5

20.7

14.8

Source: Edison Investment Research

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NSW 2000, Australia

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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