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Research: Industrials
Carr’s Group delivered a 7.0% increase in adjusted profit before tax during FY19 despite adverse weather conditions in both the US and the UK, which affected demand for feed blocks, animal feed and fuel. The profit growth was attributable to a strong performance from the Engineering division. We leave our FY20 and FY21 estimates broadly unchanged, nudge our indicative valuation up 6p to 190p/share and present FY22 estimates for the first time.
Written by
Carr's Group |
Engineering growth continues |
FY19 results |
Basic materials |
11 November 2019 |
Share price performance
Business description
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Analyst
Carr's Group is a research client of Edison Investment Research Limited |
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Carr’s Group delivered a 7.0% increase in adjusted profit before tax during FY19 despite adverse weather conditions in both the US and the UK, which affected demand for feed blocks, animal feed and fuel. The profit growth was attributable to a strong performance from the Engineering division. We leave our FY20 and FY21 estimates broadly unchanged, nudge our indicative valuation up 6p to 190p/share and present FY22 estimates for the first time.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
08/18 |
403.2 |
17.7 |
15.2 |
4.50 |
9.5 |
3.1 |
08/19 |
403.9 |
18.9 |
15.6 |
4.75 |
9.3 |
3.3 |
08/20e |
434.6 |
19.4 |
16.2 |
4.90 |
9.0 |
3.4 |
08/21e |
439.6 |
20.0 |
16.8 |
5.10 |
8.6 |
3.5 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Engineering improvement offsets weather challenges
Group revenues were virtually unchanged year-on-year during FY19 at £403.9m, with commodity price inflation, the Animax acquisition in September 2018 and high utilisation levels in the Engineering businesses compensating for lower volumes of feed block and feed. Pre-exceptional PBT (excluding amortisation of acquired intangibles and non-recurring items) rose by 7.0% to £18.9m, primarily because of the performance improvement in the Engineering division. This was ahead of our £18.1m estimate, in part because of a better than expected performance from NW Total following its acquisition in June 2019. Net debt rose by £8.4m during FY19 to £23.8m at the year end. This is primarily attributable to a £5.0m increase in working capital requirements: £4.5m capex, £10.2m on acquisitions, including deferred consideration paid and £4.2m dividend payments.
Contracts underpin further Engineering progress
Our estimates, which are broadly unchanged, show modest growth (2.5% in FY20 and 3.3% in FY21) in adjusted pre-tax profit. On the Agriculture side, we note the continued shift to high-margin branded product suitable for both domestic and international markets following the acquisition of Animax. On the Engineering side, we note that greater co-operation between activities has already helped the German robotics business win a US$8.5m contract in the US, which will benefit FY20, while the US operation won two significant Mechanical Stress Improvement Process contracts during FY19 which will primarily benefit FY21.
Valuation: Indicative valuation of 190p/share
Our DCF analysis gives an indicative value of 190p/share (previously 184p). At the current share price, Carr’s is trading below its peers with regards to the mean EV/EBITDA multiple (6.9x vs 8.2x) and P/E multiple (8.9 vs 12.6x) for FY20e. Confirmation that Carr’s diversified business model can continue to address issues caused by Brexit uncertainty plus news of further Engineering orders should, in our view, help close the valuation gap compared with the mean.
Financial performance
Divisional analysis of FY19 results
Exhibit 1: Divisional analysis of FY19 results
Year ended 31 August £m |
FY18 |
FY19 |
FY20e |
FY21e |
FY22e |
Agriculture revenues |
359.6 |
357.4 |
378.2 |
382.0 |
385.8 |
Engineering revenues |
43.6 |
46.5 |
56.4 |
57.6 |
58.8 |
Group revenues |
403.2 |
403.9 |
434.6 |
439.6 |
444.6 |
Agriculture EBITA |
10.0 |
10.9 |
11.0 |
11.2 |
11.3 |
Engineering EBITA |
4.3* |
5.3 |
6.0 |
6.2 |
6.4 |
Share of profits of JVs and associates |
3.2** |
2.7 |
2.7 |
2.9 |
3.0 |
Adjusted Group EBITA |
17.5 |
18.9 |
19.7 |
20.3 |
20.7 |
Amortisation of acquired intangibles assets and non-recurring items |
(1.1) |
(1.7) |
(0.8) |
(0.8) |
(0.8) |
Reported Group EBIT |
16.4 |
17.2 |
18.9 |
19.5 |
19.9 |
Source: Company reports, Edison Investment Research. Note: *Excluding £0.2m loss attributable to JV. **Including £0.2m loss attributable to Engineering JV.
Agriculture (£357.4m revenues, £13.6m EBITA including JV)
Divisional revenues declined by 0.6% year-on-year, reflecting lower volumes of feed blocks, feed and fuel, offset by commodity price inflation and the acquisition of Animax in September 2018. Adjusted operating profit (including profit from JVs) increased by 1.6%, reflecting the beneficial impact of Animax with its complementary animal health product portfolio.
The wetter weather conditions in the US at the interim stage continued during H2, muting feed block demand. Despite being able to access additional geographies following the commissioning of the low-moisture feed block plant in Tennessee in January 2018, total volumes declined by 2.5% year-on-year. Mild weather in the UK and mainland Europe during H119 contrasted with much colder and wetter conditions during H118, resulting in feed block volumes decreasing by 16.4% in the UK for the year as a whole and 8.0% in mainland Europe (6.4% decline globally). Management mitigated the impact on profitability through improved efficiencies and better procurement. As flagged at the AGM, the mild, dry weather reduced demand for compound feed (volumes down 10.0%, which was in line with the market overall) and fuel (volumes down 6.2%). Including acquisitions, retail sales grew by 0.9%, 2.1% on a like-for-like basis because of the store rationalisation following the purchase of Pearson Farm Supplies in October 2017.
UK farmer confidence has been adversely affected by concerns about the likelihood of a no-deal Brexit. This has manifested as a 2.8% drop in machinery revenues, albeit against record-high comparatives. As with feed blocks, management addressed these issues through a combination of improved efficiencies and good procurement, helped by supportive raw materials positions.
Looking forward, our divisional estimates, which are broadly unchanged (see below) model modest improvements in divisional revenues and profits. This is based on the probable expansion of the grazing area in the US following the prolonged rain, increased penetration of the Canadian market and enhanced distribution of Animax’s products through the division’s existing sales channels. In the longer term, we expect divisional revenue to benefit from the formation of a direct sales operation for feed blocks in New Zealand. We expect management to continue to make small acquisitions to add to the Country Store portfolio. These will be both within the existing geographical footprint and in adjacent regions where the offer is compatible. We do not expect significant expansion eastwards in the UK into predominantly arable farmland.
Engineering (£46.5m revenues, £5.3m EBITA)
Divisional revenues increased by 6.7% and adjusted EBITA by 25.1%.
The UK service and manufacturing business performed well as it worked on a strong order book backed by long-term contracts from the nuclear industry. Importantly, changes in management in both the fabrication and precision engineering businesses helped raise profitability and delivered a significant uplift in the forward order book and opportunity pipeline. Segmental revenues rose from £18.4m in FY18 to £23.0m, helped by two months’ contribution from NW Total Engineered Solutions. The US$8.5m US contract for remote handling equipment from the German business demonstrates how working with NuVision (acquired in August 2017) is securing access to the hitherto impenetrable US market. While the contract has helped top up Wälischmiller’s order book following completion of the substantial Chinese orders in FY18, most of the revenues under the contract will not be realised until the manufacturing phase commences in FY20, so revenues from the Global Robotics segment dropped from £19.5m in FY18 to £14.4m. The Global Technical Services business performed well, with revenues rising from £5.7m to £9.1m.
The strength of the divisional order book, which is based on long-term contracts from the nuclear industry, underpins our divisional estimates, which are broadly unchanged. The order book includes two significant Mechanical Stress Improvement Process contracts won during FY19, which primarily benefit FY21. Funding from the US Department of Energy to develop a small-scale working prototype of NuVision’s passive cooling technology, which is intended to prevent a repeat of the Fukushima tragedy, potentially opens a new product area longer term. While the German robotics order book is weaker than last year following the completion of the substantial Chinese orders, management remains confident of securing further sales of German equipment in the US through NuVision’s sales channels.
Group performance
P&L
Group revenues were virtually unchanged year-on-year during FY19 at £403.9m, with commodity price inflation, the Animax acquisition and high utilisation levels in the Engineering businesses compensating for lower volumes of feed blocks and feed. Pre-exceptional PBT (excluding amortisation of acquired intangibles, acquisition expenses and a £0.8m charge relating to an increase in pension liabilities following the High Court ruling to equalise the Guaranteed Minimum Pension for men and women) rose by 7.0% to £18.9m, primarily because of the performance improvement in the Engineering division. The full year dividend was raised from 4.5p/share to 4.75p/share.
Cash flow and balance sheet
Net debt rose by £8.4m during FY19 to £23.8m at the year end. This was primarily attributable to a £5.0m increase in working capital requirements: £4.5m capex, £10.2m on acquisitions, including deferred consideration paid and £4.2m dividend payments. The retirement benefit surplus reduced from £10.1m at end FY18 to £7.8m at end FY19. The group no longer makes deficit reduction contributions because the pension scheme was fully funded at the last full actuarial valuation.
Estimates
We leave our estimates broadly unchanged following the revisions made in July following the NW Total acquisition. Our minor adjustments reflect potentially lower levels of share-based payments going forward and higher levels of amortisation of acquired intangible assets. We present FY22 estimates for the first time.
Exhibit 2: Change in estimates
FY19 |
FY20e |
FY21e |
FY22e |
|||||||
£m |
Old |
Actual |
Change |
Old |
New |
Change |
Old |
New |
Change |
New |
Agriculture revenues |
372.6 |
357.4 |
-4.1% |
378.2 |
378.2 |
0.0% |
382.0 |
382.0 |
0.0% |
385.8 |
Agriculture EBITA |
13.4 |
13.6 |
1.1% |
13.5 |
13.7 |
1.5% |
14.0 |
14.1 |
0.6% |
14.3 |
Engineering revenues |
46.2 |
46.5 |
0.8% |
56.4 |
56.4 |
0.0% |
57.6 |
57.6 |
0.0% |
58.8 |
Engineering EBITA |
4.6 |
5.3 |
15.5% |
5.9 |
6.0 |
0.8% |
6.1 |
6.2 |
2.5% |
6.4 |
Group revenues |
418.8 |
403.9 |
-3.6% |
434.6 |
434.6 |
0.0% |
439.6 |
439.6 |
0.0% |
444.6 |
Adjusted PBT |
18.1 |
18.9 |
4.6% |
19.4 |
19.4 |
0.0% |
20.0 |
20.0 |
0.0% |
20.4 |
EPS (p) |
15.2 |
15.6 |
2.5% |
16.4 |
16.2 |
-0.9% |
16.9 |
16.8 |
-0.7% |
17.2 |
DPS(p) |
4.7 |
4.8 |
1.1% |
4.9 |
4.9 |
0.0% |
5.1 |
5.1 |
0.0% |
5.3 |
Net (cash)/debt |
27.5 |
23.8 |
-13.5% |
28.7 |
29.0 |
1.0% |
23.5 |
24.5 |
4.4% |
20.0 |
Source: Edison Investment Research
Valuation
DCF methodology
Exhibit 3: DCF valuation
Discount rate (post-tax, nominal) |
||||||
9.0% |
9.5% |
10.0% |
10.5% |
11.0% |
||
Terminal growth |
0.0% |
197 |
185 |
174 |
165 |
156 |
1.0% |
218 |
203 |
190 |
179 |
168 |
|
1.5% |
230 |
214 |
199 |
187 |
175 |
|
2.0% |
244 |
226 |
210 |
196 |
183 |
|
3.0% |
279 |
256 |
235 |
218 |
202 |
|
Source: Edison Investment Research
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. This gives a fair value of 190p/share (previously 184p/share). The valuation gap should close once there is clarity on trading arrangements post-Brexit and news of further contracts to replenish the order book for the German robotics business.
Peer-based multiples
Exhibit 4: Peer multiple analysis
Market cap (£m) |
EV/EBITDA (x) |
EV/EBITDA (x) |
P/E (x) |
P/E (x) |
|
Anpario |
77 |
10.4 |
9.6 |
16.7 |
15.6 |
BayWa |
793 |
12.8 |
12.2 |
16.8 |
14.8 |
NWF Group |
83 |
6.1 |
6.1 |
11.0 |
10.8 |
Origin Enterprises |
504 |
7.1 |
6.9 |
8.6 |
8.4 |
Ridley Corporation |
176 |
7.3 |
6.3 |
15.0 |
12.2 |
Wynnstay Group |
55 |
5.5 |
5.3 |
7.7 |
7.4 |
Mean |
8.2 |
7.7 |
12.6 |
11.5 |
|
Carr's Group @ 145p/share |
133 |
6.9* |
6.8* |
8.9 |
8.6 |
Carr's Group @ 190p/share |
175 |
8.7* |
8.6* |
11.7 |
11.3 |
Source: Refinitiv estimates, Edison Investment Research. Note: *Excluding JVs. Prices at 7 November 2019.
In Exhibit 4 we compare Carr’s EV/EBITDA and P/E multiples for the years ended August 2020 and August 2021 with calendarised multiples for listed peers in the agricultural sector. At the current share price (145p), on our estimates (which are broadly unchanged since the upward revision made in July following the NW Total acquisition) Carr’s is trading below its peers with regards to the mean EV/EBITDA multiple (6.9x vs 8.2x) and P/E (8.9x vs 12.6x) multiples for the year ending August 2020. At the indicative value of 190p/share derived from our DCF calculation, Carr’s implied EV/EBITDA multiple for the year ending August 2020 is slightly higher than the peer group average (8.7x vs 8.2x), while the P/E multiple is slightly lower (11.7x vs 12.6x).
Exhibit 5: Financial summary
£m |
2018 |
2019 |
2020e |
2021e |
2022e |
||
Year-end Aug |
|||||||
PROFIT & LOSS |
|||||||
Revenue |
|
|
403.2 |
403.9 |
434.6 |
439.6 |
444.6 |
EBITDA |
|
|
19.9 |
22.1 |
22.8 |
23.2 |
23.5 |
Share of post-tax profits in JVs and associates |
3.2 |
2.7 |
2.7 |
2.9 |
3.0 |
||
Operating Profit (before amort. and except.) |
|
|
18.6 |
19.8 |
20.6 |
21.2 |
21.6 |
Amortisation of acquired intangibles |
(0.3) |
(0.8) |
(0.8) |
(0.8) |
(0.8) |
||
Exceptionals |
(0.8) |
(0.9) |
0.0 |
0.0 |
0.0 |
||
Operating Profit |
16.4 |
17.2 |
18.9 |
19.5 |
19.9 |
||
Net Interest |
(0.9) |
(0.9) |
(1.2) |
(1.2) |
(1.2) |
||
3.2 |
2.7 |
2.7 |
2.9 |
3.0 |
|||
Profit Before Tax (norm) |
|
|
17.7 |
18.9 |
19.4 |
20.0 |
20.4 |
Profit Before Tax (FRS 3) |
|
|
15.5 |
16.3 |
17.7 |
18.3 |
18.7 |
Tax |
(1.9) |
(2.7) |
(2.9) |
(3.0) |
(3.0) |
||
Profit After Tax (norm) |
15.6 |
15.9 |
16.5 |
17.0 |
17.4 |
||
Profit After Tax (FRS 3) |
13.6 |
13.6 |
14.8 |
15.3 |
15.7 |
||
Minority interest |
(1.8) |
(1.6) |
(1.6) |
(1.6) |
(1.6) |
||
Net income (norm) |
13.9 |
14.3 |
14.9 |
15.5 |
15.8 |
||
Net income (FRS 3) |
11.9 |
12.0 |
13.2 |
13.8 |
14.1 |
||
Average Number of Shares Outstanding (m) |
91.4 |
91.8 |
91.9 |
91.9 |
91.9 |
||
EPS - normalised (p) |
|
|
15.2 |
15.6 |
16.2 |
16.8 |
17.2 |
EPS |
|
|
14.8 |
15.2 |
15.8 |
16.4 |
16.7 |
EPS - FRS 3 (p) |
|
|
13.0 |
13.1 |
14.4 |
15.0 |
15.3 |
Dividend per share (p) |
4.50 |
4.75 |
4.90 |
5.10 |
5.30 |
||
EBITDA Margin (%) |
4.9 |
5.5 |
5.2 |
5.3 |
5.3 |
||
Operating Margin (before GW and except.) (%) |
4.6 |
4.9 |
4.7 |
4.8 |
4.9 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
96.5 |
115.6 |
115.7 |
115.8 |
115.9 |
Intangible Assets |
26.5 |
42.2 |
42.6 |
42.9 |
43.3 |
||
Tangible Assets, Deferred tax assets and Pension surplus |
70.0 |
73.4 |
73.1 |
72.9 |
72.6 |
||
Current Assets |
|
|
134.7 |
140.7 |
147.8 |
150.8 |
153.8 |
Stocks |
42.4 |
46.3 |
52.4 |
53.0 |
53.6 |
||
Debtors |
67.7 |
65.8 |
75.0 |
75.9 |
76.7 |
||
Cash |
24.6 |
28.6 |
20.4 |
21.9 |
23.5 |
||
Current Liabilities |
|
|
(99.5) |
(88.8) |
(90.9) |
(88.7) |
(86.5) |
Creditors including tax, social security and provisions |
(64.5) |
(64.9) |
(70.1) |
(70.9) |
(71.7) |
||
Short term borrowings |
(35.0) |
(23.9) |
(20.9) |
(17.9) |
(14.9) |
||
Long Term Liabilities |
|
|
(10.8) |
(36.6) |
(36.6) |
(36.6) |
(36.6) |
Long term borrowings |
(5.0) |
(28.6) |
(28.6) |
(28.6) |
(28.6) |
||
Other long term liabilities |
(5.8) |
(8.0) |
(8.0) |
(8.0) |
(8.0) |
||
Net Assets |
|
|
121.0 |
131.0 |
136.0 |
141.3 |
146.6 |
Minority interest |
(15.7) |
(16.7) |
(17.7) |
(18.7) |
(19.7) |
||
Shareholders’ equity |
|
|
105.3 |
114.3 |
118.3 |
122.5 |
126.9 |
CASH FLOW |
|||||||
Operating Cash Flow |
|
|
15.0 |
16.0 |
12.6 |
22.5 |
22.8 |
Net Interest |
(1.0) |
(1.1) |
(1.2) |
(1.2) |
(1.2) |
||
Tax |
(2.5) |
(2.3) |
(2.9) |
(3.0) |
(3.0) |
||
Investment activities |
(2.8) |
(4.2) |
(5.8) |
(5.8) |
(5.8) |
||
Acquisitions/disposals |
(4.2) |
(10.2) |
(3.5) |
(3.5) |
(3.5) |
||
Equity financing and other financing activities |
(0.1) |
0.6 |
0.0 |
0.0 |
0.0 |
||
Dividends |
(3.8) |
(4.2) |
(4.4) |
(4.5) |
(4.7) |
||
Net Cash Flow |
0.5 |
(5.4) |
(5.2) |
4.5 |
4.5 |
||
Opening net debt/(cash) |
|
|
14.1 |
15.4 |
23.8 |
29.0 |
24.5 |
HP finance leases initiated |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other |
1.7 |
3.0 |
0.0 |
0.0 |
0.0 |
||
Closing net debt/(cash) |
|
|
15.4 |
23.8 |
29.0 |
24.5 |
20.0 |
Source: Company reports, Edison Investment Research
|
|
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