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Research: Industrials
Carr’s Group notes that the continued recovery in UK agriculture, supported by improving farmer confidence, is offsetting weak demand in the US for feed blocks caused by a surplus of cattle following a period of restocking. Importantly, management is seeing the first signs of recovery in the US market. This, together with a strong order book for the remote handling activity and improved prospects for the UK Manufacturing activity, underpin our expectations of profit recovery next year. We leave our estimates and valuation unchanged.
Written by
Carr's Group |
Contract award supports FY18 profit recovery |
Trading update |
Food & beverages |
20 July 2017 |
Share price performance
Business description
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Analysts
Carr's Group is a research client of Edison Investment Research Limited |
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Carr’s Group notes that the continued recovery in UK agriculture, supported by improving farmer confidence, is offsetting weak demand in the US for feed blocks caused by a surplus of cattle following a period of restocking. Importantly, management is seeing the first signs of recovery in the US market. This, together with a strong order book for the remote handling activity and improved prospects for the UK Manufacturing activity, underpin our expectations of profit recovery next year. We leave our estimates and valuation unchanged.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
08/15 |
331.3 |
14.2 |
10.6 |
3.7 |
12.9 |
2.7 |
08/16 |
314.9 |
14.0 |
10.6 |
3.8** |
12.9 |
2.8 |
08/17e |
332.2 |
11.8 |
8.9 |
3.9 |
15.3 |
2.9 |
08/18e |
336.0 |
14.7 |
11.1 |
4.0 |
12.3 |
2.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Excluding 17.54p special dividend.
Recovery in UK agriculture continues
Management’s expectations at the interim stage that the UK Agriculture sector would remain positive have proved correct. The improvement in farmgate milk prices has boosted farmer confidence, resulting in higher demand for feed, for other agricultural inputs and for farm machinery, which is particularly sensitive to farmer sentiment. US deadweight cattle prices have risen, giving management confidence of feed block demand returning during FY18. In parallel, the group is taking a pro-active approach to drive growth eg acquiring Cheshire-based feed merchant Mortimer Feeds in June, thus strengthening its presence in a key dairy region.
Delayed manufacturing contract now signed
The remote handling business, which is focused on the nuclear industry, continues to perform well as it delivers on some large orders into China. The order book is at its highest level for several years. As flagged, the UK manufacturing business was impacted by delays in commencing a major contract expected to utilise a significant proportion of FY17 production capacity. Capacity has been filled instead with lower margin business for the oil and gas sector. The contract is now in, supporting divisional recovery from FY18 onwards.
Valuation: Uplift from US feed block recovery
We expect a recovery in profits during FY18 because the dip in Engineering is related to one-off events and even if underlying demand for feed blocks in the US does not completely recover to FY16 levels, the additional volumes going to new geographies from the Tennessee facility should make up for any shortfall. Our valuation methodology is therefore based on a DCF analysis, as this captures the medium- and long-term prospects for the group. We continue to use a conservative 10.0% WACC and a 1.0% terminal growth rate, which gives a fair value of 158p/share. Evidence of an improvement in US feed block volumes supporting a recovery in Agriculture profits during FY18 should help close the valuation gap.
Exhibit 1: Financial summary
£m |
2015 |
2016 |
2017e |
2018e |
2019e |
||
Year-end Aug |
|||||||
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 |
91.4 |
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: Edison Investment Research. Note: *Excluding 17.54p special dividend.
|
|
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