Short-term dip in profits expected

Carr’s Group 4 April 2017 Update
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Carr’s Group

Short-term dip in profits expected

Trading update

General industrials

 

4 April 2017

Price

133.00p

Market cap

£122m

Net debt (£m) at end December 2016

16.9

Shares in issue

91.4m

Free float

79.6%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(12.8)

(10.2)

(13.1)

Rel (local)

(12.0)

(12.0)

(26.0)

52-week high/low

167.2p

124.0p

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

Interim results

12 April 2017

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 Group has announced that the situation regarding demand for feed blocks in the US and utilisation in the Engineering division’s UK manufacturing operations continue to be problematic. Both were identified as potential issues in the January trading update. The overall improvement in the agricultural sector has continued, but an uplift in profitability in this activity is not expected to be sufficient to offset the shortfall elsewhere. We revise our estimates and reduce our indicative valuation, which is based on the medium- and long-term prospects for the group, from 161p/share to 158p/share.

Year end

Revenue (£m)

PBT* (£m)

EPS* (p)

DPS (p)

P/E (x)

Yield (%)

08/15

331.3

14.2

10.6

3.7

12.5

2.8

08/16

314.9

14.0

10.6

3.8**

12.5

2.9

08/17e

332.2

11.8

8.9

3.9

14.9

2.9

08/18e

336.0

14.7

11.1

4.0

12.0

3.0

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

Engineering margins affected by contract delays

In January management noted a significant delay with a contract for the UK Manufacturing business from the nuclear sector that had previously been expected to utilise a significant proportion of FY17 production capacity but would not begin until towards the year end. Management has achieved its goal of replacing much of this work with other contracts, but these are from the oil and gas sector and are therefore at a lower margin than the work they replace. The Materials Handling activity is trading ahead of expectations, winning major contracts in China.

Weak demand for feed blocks in the US continues

In January management noted that demand for feed blocks in the US was flat because of lower beef cattle prices. While prices have begun to pick up, the recovery in demand is taking longer than management had expected. Although the UK agricultural activities are performing better than expected, supported by slightly stronger commodity prices, this is not sufficient to offset the shortfall in the US.

Valuation: Long-term view unaffected

Our DCF analysis, which is based on a long-term view of the group’s prospects, is relatively unaffected by the cut to our FY17 profit estimates, with the indicative value reducing from 161p/share to 158p/share. At this level, the stock’s FY18e EV/EBITDA and P/E multiples are in line with the average for peers engaged in agricultural supply, supporting our view of mid- and long-term indicative value. At current share price levels the stock’s EV/EBITDA and P/E multiples are in line with the peer averages for FY17e but trading on a substantial discount for FY18e. This indicates that, following the recent c 10% drop in the share price, the FY17e profit reduction is already priced in, with potential for share price appreciation towards our indicative valuation of 158p. This would be driven by evidence of an improvement in US feed block volumes supporting a recovery in Agriculture profits during FY18.

Changes to estimates

We revise our estimates as follows:

Revenues from the Agriculture division are left unchanged for FY17e and FY18e as the reduction in US feed block volumes is offset by an improvement in commodity prices. Profits from the Agriculture division are reduced in FY17e and FY18e, to reflect the reduction in US feed block volumes, which are a high-margin product.

Revenues from the Engineering division are unchanged for FY17e and FY18e as work on the delayed nuclear contract has been replaced by other business. However, as this replacement activity is related to the oil and gas sector, it generates a lower margin than projects in the nuclear sector, so we reduce our divisional EBIT.

The share of profits from JVs and associates, which are primarily engaged in agricultural supply activities in the UK, are raised slightly to reflect an improvement in the sector supported by modest improvements in commodity prices.

Exhibit 1: Estimate revisions

2016

2017e

2018e

2019e

Actual

Old

New

% change

Old

New

% change

Old

New

% change

Agriculture revenues (£m)

284.8

294.7

294.7

0.0

297.6

297.6

0.0

300.6

300.6

0.0

Agriculture EBIT (£m)

10.3

9.8

8.3

-15.3

10.0

9.6

-4.0

10.2

10.0

-2.0

Engineering revenues (£m)

30.1

37.5

37.5

0.0

38.4

38.4

0.0

39.4

39.4

0.0

Engineering EBIT (£m)

2.5

2.9

1.4

-51.7

3.6

3.2

-11.1

4.0

4.0

0.0

Share of profits of JVs and associates (£m)

2.1

2.0

2.2

+10.0

2.0

2.2

+10.0

2.1

2.3

+9.5

Group revenues (£m)

314.9

332.2

332.2

0.0

336.0

336.0

0.0

340.0

340.0

0.0

Group adjusted PBT (£m)

14.0

14.6

11.8

-19.2

15.3

14.7

-3.9

16.0

16.0

0.0

Group adjusted EPS (p)

10.6

10.7

8.9

-16.8

11.2

11.1

-0.9

11.8

11.8

0.0

Source: Carr’s Group accounts, Edison Investment Research

Valuation

Since the substantial year-on-year reduction in estimated profits for FY17 is related to one-off factors, it is reasonable to expect a partial recovery in FY18 (ie only a modest downwards revision to estimates) and a complete recovery in FY19 (ie no change to estimated profits). We therefore modify our valuation methodology to emphasise techniques that look at the medium- and long-term prospects for the group. In our December note, we used a DCF analysis to back up a calculation based on peer multiples. This time we use a DCF analysis as the primary technique, comparing the result from that with peer multiples. We continue to use a conservative 10.0% WACC and a 1.0% terminal growth rate for our DCF calculation, as in our December note. This gives a fair value of 158p (previously160p/share from the DCF analysis and 161p/share from the comparison of peer multiples).

Exhibit 2: DCF calculation (p/share)

Discount rate (post-tax, nominal)

9.0%

9.5%

10.0%

10.5%

11.0%

Terminal growth

0.0%

163

154

147

139

133

1.0%

178

167

158

150

142

1.5%

187

175

165

155

147

2.0%

197

184

172

162

153

3.0%

222

205

191

178

167

Source: Edison Investment Research

A comparison of Carr’s EV/EBITDA and P/E multiples for the years ended August 2017 and August 2018 with calendarised multiples for listed peers in the agricultural sector is shown in Exhibit 3. At the current share price, Carr’s is trading in line with peers with regards to mean EV/EBITDA (9.3x vs 9.5x) and mean P/E (15.2x vs 15.8x) for the year ending August 2017, but at a substantial discount to both the EV/EBITDA and P/E averages for the year ending August 2018. Assuming that the recovery modelled in our estimates is reasonable, then the discount to the average peer multiples is temporary and the gap should close as feed block demand recovers in the US. There is already sufficient visibility of the 2018 Engineering order book, which is based on long-term contracts in the nuclear industry, to give confidence in a recovery in this division. At the indicative value of 158p/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 average (8.8x vs 9.0x), as is the P/E multiple (14.2x vs 14.4x). This supports our view that the 158p indicative valuation from the DCF calculation is reasonable, provided that there is a recovery in US feed block volumes during FY18. The valuation gap should begin to close on news of positive developments in this area. An early signal of this recovery would be continued improvement in US beef cattle prices.

Exhibit 3: Peer multiple analysis

Company

Market cap

EV/EBITDA (x) Aug17

EV/EBITDA (x) Aug18

P/E (x) Aug17

P/E (x) Aug18

BayWa AG

£885m

11.0x

10.3x

16.9x

13.5x

NWF Group PLC

£69m

6.0x

5.9x

10.3x

10.0x

Origin Enterprises PLC

£709m

10.8x

10.4x

14.7x

13.9x

Ridley Corp Ltd

£249m

8.2x

7.3x

16.7x

14.8x

Wynnstay Group PLC

£125m

11.6x

11.2x

20.4x

19.6x

Mean

 

9.5x

9.0x

15.8x

14.4x

Carr's Group at 136p/share

£124m

9.3x

7.6x

15.2x

12.2x

Carr's Group at 158p/share

£144m

10.8x

8.8x

17.7x

14.2x

Source: Bloomberg, Edison Investment Research. Note: Prices at 31 March 2017.

Exhibit 4: Financial summary

£m

2015

2016

2017e

2018e

2019e

Year-end 31 August

PROFIT & LOSS

Revenue

 

331.3

314.9

332.2

336.0

340.0

EBITDA

 

16.0

16.5

14.1

17.4

18.6

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

12.6

12.7

10.2

13.3

14.5

Amortisation of acquired intangibles

0.0

0.0

0.0

0.0

0.0

Share-based payments

(0.5)

0.1

(0.5)

(0.5)

(0.5)

Exceptionals

0.0

0.0

0.0

0.0

0.0

Operating Profit

12.1

12.8

9.7

12.8

14.0

Net Interest

(0.7)

(0.8)

(0.6)

(0.8)

(0.8)

Share of post-tax profits in JVs and associates

2.3

2.1

2.2

2.2

2.3

Profit Before Tax (norm)

 

14.2

14.0

11.8

14.7

16.0

Profit Before Tax (FRS 3)

 

13.7

14.1

11.3

14.2

15.5

Tax

(3.0)

(2.9)

(2.1)

(3.0)

(3.7)

Profit After Tax (norm)

11.2

11.1

9.7

11.7

12.3

Profit After Tax (FRS 3)

10.7

11.2

9.2

11.2

11.8

Post tax profit (loss) relating to discontinued operations

3.0

2.8

0.0

0.0

0.0

Minority interest

(1.7)

(1.5)

(1.5)

(1.5)

(1.5)

Net income (norm)

9.5

9.5

8.2

10.2

10.8

Net income (FRS 3)

12.0

12.5

7.7

9.7

10.3

Average Number of Shares Outstanding (m)

89.6

90.1

91.3

91.4

91.4

EPS - normalised (p)

 

10.6

10.6

8.9

11.1

11.8

EPS - normalised fully diluted (p)

 

10.2

10.2

8.6

10.8

11.4

EPS - FRS 3 (p)

 

13.4

13.8

8.4

10.6

11.2

Dividend per share (p)

3.7

3.8*

3.9

4.0

4.2

EBITDA Margin (%)

4.8

5.2

4.2

5.2

5.5

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

3.8

4.0

3.1

4.0

4.3

BALANCE SHEET

Fixed Assets

 

86.5

63.1

73.0

72.4

71.8

Intangible Assets

11.3

11.7

16.0

16.0

16.0

Tangible Assets and Deferred tax assets

75.2

51.4

57.0

56.4

55.7

Current Assets

 

120.4

139.1

116.5

121.1

126.1

Stocks

35.0

33.4

32.4

33.0

34.0

Debtors

65.3

57.2

55.5

56.5

57.5

Cash

20.1

48.4

28.7

31.6

34.6

Current Liabilities

 

(73.8)

(69.0)

(66.3)

(66.1)

(64.1)

Creditors including tax, social security and provisions

(55.0)

(47.3)

(47.7)

(50.5)

(51.5)

Short term borrowings

(18.7)

(21.6)

(18.6)

(15.6)

(12.6)

Long Term Liabilities

 

(34.2)

(23.1)

(23.1)

(23.1)

(23.1)

Long term borrowings

(25.7)

(18.6)

(18.6)

(18.6)

(18.6)

Retirement benefit obligation

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(8.5)

(4.5)

(4.5)

(4.5)

(4.5)

Net Assets

 

99.0

110.1

100.1

104.3

110.6

Minority interest

(11.9)

(13.4)

(13.4)

(13.4)

(13.4)

Shareholders’ equity

 

87.1

96.7

86.8

90.9

97.3

CASH FLOW

Operating Cash Flow

 

14.3

11.7

17.3

18.5

17.6

Net Interest

(0.5)

(0.5)

(0.6)

(0.8)

(0.8)

Tax

(3.9)

(1.1)

(2.1)

(3.0)

(3.7)

Investment activities

(4.0)

(2.9)

(7.9)

(3.5)

(3.5)

Acquisitions/disposals

(1.7)

22.7

(4.2)

(1.8)

0.0

Equity financing and other financing activities

(0.3)

1.0

0.0

0.0

0.0

Dividends

(3.1)

(3.3)

(19.2)

(3.6)

(3.7)

Net Cash Flow

0.8

27.5

(16.7)

5.9

6.0

Opening net debt/(cash)

 

24.6

24.4

(8.1)

8.6

2.7

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

0.6

(5.1)

0.0

0.0

0.0

Closing net debt/(cash)

 

24.4

(8.1)

8.6

2.7

(3.4)

Source: Carr’s Group accounts, Edison Investment Research. 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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Carr’s Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2017 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Carr’s Group and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

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

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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