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Research: Industrials
Carr’s Group has provided an update for the 20-week period ended 17 July 2021, which notes that FY21 performance is expected to be moderately ahead of management expectations. Strong performances from both the Speciality Agriculture and Agricultural Supplies divisions have continued into H221. The H221 Engineering divisional recovery that management expected has been realised, supported by contracts from the nuclear and defence markets, and rising oil and gas prices. We raise our FY21 adjusted PBT estimate by 4.5%, leaving FY22 and FY23 estimates unchanged.
Carr’s Group |
Improved FY21 expectations |
Trading update |
General industrials |
19 July 2021 |
Share price performance
Business description
Next event
Analyst
Carr’s Group is a research client of Edison Investment Research Limited |
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Carr’s Group has provided an update for the 20-week period ended 17 July 2021, which notes that FY21 performance is expected to be moderately ahead of management expectations. Strong performances from both the Speciality Agriculture and Agricultural Supplies divisions have continued into H221. The H221 Engineering divisional recovery that management expected has been realised, supported by contracts from the nuclear and defence markets, and rising oil and gas prices. We raise our FY21 adjusted PBT estimate by 4.5%, leaving FY22 and FY23 estimates unchanged.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
08/19 |
403.9 |
18.0 |
14.6 |
4.75 |
10.2 |
3.2 |
08/20 |
395.6 |
14.9 |
11.9 |
4.75 |
12.6 |
3.2 |
08/21e |
440.0 |
16.1 |
11.6 |
4.90 |
12.9 |
3.3 |
08/22e |
447.0 |
16.5 |
13.0 |
5.10 |
11.5 |
3.4 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
Strong performance from agricultural activities
As management had expected at the time of the interims, the buoyant livestock prices which stimulated demand for feed blocks and led to a strong performance from the Speciality Agriculture division in H121 have continued into H221. Together with continued recovery in the animal health business, this resulted in a significant improvement in divisional performance compared with FY20. Similarly, the buoyant milk and livestock prices and an improvement in UK farmer confidence generally as the prospect of a no-deal Brexit disappeared have continued into H221. This has driven an increase in like-for-like retail sales and strong growth in machinery revenues, which more than offset margin pressures on feed in the Agricultural Supplies division, resulting in divisional outperformance compared with management expectations.
Benefit of recovery in oil & gas market
The Engineering division’s performance was adversely affected during H121 by low oil prices that reduced investment in the oil and gas market, which had a negative impact on demand for precision machined parts. However, the second-half recovery indicated by order book at end H121 has materialised. The performance improvement was supported by a recovery in the oil & gas market, and reduced overhead costs resulting from minor restructuring programmes at the end of FY20 and during H121 following the appointment of new CEO Hugh Pelham.
Valuation: Indicative valuation of 165p/share
Our DCF analysis gives an indicative value of 165p/share (previously 170p/share), with the small reduction reflecting higher UK corporation tax rates from April 2023 onwards. We believe that the valuation gap with respect to our indicative valuation and the peer averages should continue to close as the improved order book in Engineering and turnaround programme at one of the Engineering manufacturing businesses converts to improved divisional performance.
Changes to estimates
We make the following changes to our estimates:
■
We increase FY21 central costs by £1.8m to reflect a change in apportioning costs between operating companies and HQ, and raise EBITA from each of the three operating divisions to balance that out. We raise FY21 group EBITA by £0.6m and Agricultural Supplies revenues by £6.8m to reflect outperformance in this division, supported by strong machinery revenues and higher than expected margins in the retail operations. We note that FY22 Speciality Agriculture EBITA is likely to be lower than FY21 because UK lamb prices are beginning to fall and demand for feed blocks in the US will reduce if the current drought there is prolonged.
■
We reduce FY21 interest payments slightly to reflect robust working capital management and lower average debt.
■
We apply a similar reapportionment of costs between the operating divisions and HQ in FY22 and FY23. Management expects that FY22 central costs will be unusually high because of the transfer between CEOs.
■
We apply an adjustment to FY21 tax to reflect a restatement of deferred tax to 25% and to FY23 tax to reflect the proposed increase in UK corporation tax to 25% from April 2023 onwards.
Exhibit 1: Revisions to estimates
£m |
2020 |
2021e |
2022e |
2023e |
||||||
Actual |
Old |
New |
Change |
Old |
New |
Change |
Old |
New |
Change |
|
Speciality Agriculture revenues |
61.9 |
66.8 |
66.8 |
0.0% |
72.2 |
72.2 |
0.0% |
76.5 |
76.5 |
|
Agricultural Supplies revenues |
280.7 |
313.2 |
320.0 |
2.2% |
319.8 |
319.8 |
0.0% |
322.5 |
322.5 |
|
Total Agriculture revenues |
342.6 |
380.0 |
386.8 |
1.8% |
392.0 |
392.0 |
0.0% |
399.0 |
399.0 |
0.0% |
Engineering revenues |
53.0 |
53.2 |
53.2 |
0.0% |
55.0 |
55.0 |
0.0% |
62.0 |
62.0 |
0.0% |
Group revenues (£m) |
395.6 |
433.2 |
440.0 |
1.6% |
447.0 |
447.0 |
0.0% |
461.0 |
461.0 |
0.0% |
Speciality Agriculture EBITA excluding JVs |
6.5 |
7.1 |
7.4 |
4.2% |
7.1 |
7.4 |
4.2% |
7.2 |
7.9 |
9.7% |
Agricultural Supplies EBITA excluding JVs |
4.2 |
4.3 |
4.8 |
11.6% |
4.4 |
4.9 |
11.4% |
4.5 |
5.0 |
11.1% |
Agriculture JVs EBITA |
2.6 |
2.8 |
2.8 |
0.0% |
2.8 |
2.8 |
0.0% |
2.9 |
2.9 |
0.0% |
Total Agriculture EBITA including JVs |
13.4 |
14.1 |
15.8 |
12.1% |
14.3 |
15.1 |
5.6% |
14.6 |
15.8 |
8.2% |
Engineering EBITA |
3.8 |
4.0 |
4.7 |
17.5% |
4.2 |
4.9 |
16.7% |
5.0 |
5.3 |
5.0% |
Central costs (£m) |
(1.0) |
(1.7) |
(3.5) |
-180.0% |
(1.0) |
(2.5) |
-150.0% |
(1.1) |
(2.5) |
-145.0% |
Group EBITA after deducting share-based payments (£m) |
16.2 |
16.4 |
17.0 |
3.7% |
17.5 |
17.5 |
0.0% |
18.6 |
18.6 |
0.0% |
Normalised PBT after deducting share-based payments (£m) |
14.9 |
15.4 |
16.1 |
4.5% |
16.5 |
16.5 |
0.0% |
17.6 |
17.6 |
0.0% |
Normalised undiluted EPS after deducting share-based payments (p) |
11.9 |
12.2 |
11.6 |
-4.9% |
13.0 |
13.0 |
-0.2% |
14.0 |
13.7 |
-1.9% |
Dividend per share (p) |
4.75 |
4.9 |
4.9 |
0.0% |
5.1 |
5.1 |
0.0% |
5.3 |
5.3 |
0.0% |
Net debt/(cash) (£m) |
32.8 |
27.8 |
29.0 |
4.1% |
26.1 |
26.7 |
2.2% |
20.3 |
21.1 |
3.9% |
Source: Edison Investment Research
Valuation
DCF methodology
Our valuation methodology is based on a discounted cash flow (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 165p/share (previously 170p/share), with the modest reduction reflecting the impact of higher corporation tax rates from April 2023 onwards. We prefer a DCF analysis to a peer-based multiples approach because it looks beyond any short-term issues of unseasonal weather, to which the group, like other companies engaged in agricultural supply, is exposed. The share price has risen by 9% since the interims in April. We believe the valuation gap should continue to close as the improved order book in Engineering and turnaround programme at one of the Engineering manufacturing businesses converts to improved divisional performance.
Exhibit 2: DCF valuation (p/share) – sensitivities to WACC and terminal growth assumptions
WACC |
||||||
9.0% |
9.5% |
10.0% |
10.5% |
11.0% |
||
Terminal growth |
0.0% |
170 |
162 |
154 |
148 |
142 |
1.0% |
184 |
174 |
165 |
157 |
150 |
|
1.5% |
193 |
181 |
172 |
163 |
155 |
|
2.0% |
202 |
190 |
179 |
169 |
161 |
|
3.0% |
226 |
210 |
196 |
184 |
174 |
|
Source: Edison Investment Research
Peer-based multiples
In Exhibit 3 we compare Carr’s prospective EV/EBITDA and P/E multiples with those for its listed peers in the agricultural sector. At the current share price (149.5p), Carr’s is trading below the mean for its peers (excluding Anpario) on all metrics except for FY21 P/E which is distorted by the deferred tax adjustment. In our opinion, this discount is not justified because Carr’s feed block activity in North America, mainland Europe and New Zealand reduces the exposure of its agricultural businesses to challenges caused by the UK climate and government policy. This sets Carr’s apart from both NWF and Wynnstay, whose agricultural activities are confined to the UK. In addition, since a material proportion of operating profit (FY20: 44%) is derived from the Speciality Agriculture division, Carr’s Group merits multiples that are closer to the higher values achieved by natural feed additives provider Anpario than agricultural supply companies like ForFarmers or Origin Enterprises.
Exhibit 3: Peer based multiples
Name |
Market cap |
EV/EBITDA 1FY (x) |
EV/EBITDA 2FY (x) |
P/E |
P/E |
Anpario |
158.9 |
20.9 |
20.1 |
31.2 |
30.4 |
ForFarmers |
396.9 |
4.8 |
4.8 |
11.4 |
10.7 |
NWF Group |
106.9 |
6.8 |
6.8 |
12.0 |
12.4 |
Origin Enterprises |
374.0 |
8.6 |
8.1 |
9.6 |
8.8 |
Ridley Corporation |
190.5 |
7.3 |
7.0 |
16.4 |
13.8 |
Wynnstay Group |
110.8 |
8.5 |
8.3 |
15.1 |
14.6 |
Mean excluding Anpario |
7.2 |
7.0 |
12.9 |
12.0 |
|
Mean including Anpario |
9.5 |
9.2 |
16.0 |
15.1 |
|
Carr's Group @ 149.5p/share |
140.1 |
6.6 |
6.4 |
12.9 |
11.5 |
Carr's Group @ 165p/share |
154.6 |
7.2 |
7.0 |
14.3 |
12.7 |
Source: Edison Investment Research, Refinitiv. Note: Prices as at 15 July 2021
At the indicative value of 165p/share derived from our DCF calculation, Carr’s would be trading in line with the average for its peers, excluding Anpario, except for FY21 P/E which is distorted by the deferred tax adjustment. It would be trading at a discount on all metrics if Anpario was included in the mean calculation.
Exhibit 4: Financial summary
£m |
2019 |
2020 |
2021e |
2022e |
2023e |
||
31-August |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
|||||||
Revenue |
|
|
403.9 |
395.6 |
440.0 |
447.0 |
461.0 |
EBITDA |
|
|
23.8 |
23.4 |
24.2 |
24.7 |
25.7 |
Operating Profit (before amor. and except.) |
|
18.9 |
16.2 |
17.0 |
17.5 |
18.6 |
|
Amortisation of acquired intangibles |
(0.8) |
(1.4) |
(1.3) |
(1.3) |
(1.3) |
||
Exceptionals |
(0.9) |
(1.0) |
(0.2) |
0.0 |
0.0 |
||
Share of post-tax profit from JVs and associate |
2.7 |
2.6 |
2.8 |
2.8 |
2.9 |
||
Reported operating profit |
17.2 |
13.8 |
15.5 |
16.2 |
17.3 |
||
Net Interest |
(0.9) |
(1.3) |
(0.9) |
(1.0) |
(1.0) |
||
Profit Before Tax (norm) |
|
|
18.0 |
14.9 |
16.1 |
16.5 |
17.6 |
Profit Before Tax (reported) |
|
|
16.3 |
12.5 |
14.6 |
15.2 |
16.3 |
Reported tax |
(2.7) |
(1.6) |
(3.8) |
(2.7) |
(3.1) |
||
Profit After Tax (norm) |
15.1 |
13.3 |
12.3 |
13.8 |
14.4 |
||
Profit After Tax (reported) |
13.6 |
10.9 |
10.8 |
12.5 |
13.1 |
||
Minority interests |
(1.6) |
(1.4) |
(1.6) |
(1.6) |
(1.6) |
||
Net income (normalised) |
13.4 |
11.0 |
10.8 |
12.2 |
12.8 |
||
Net income (reported) |
12.0 |
9.5 |
9.3 |
10.9 |
11.5 |
||
Average number of shares outstanding (m) |
91.8 |
92.3 |
93.1 |
93.7 |
93.7 |
||
EPS - normalised (p) |
|
|
14.6 |
11.9 |
11.6 |
13.0 |
13.7 |
EPS - normalised fully diluted (p) |
|
|
14.2 |
11.8 |
11.4 |
12.7 |
13.3 |
EPS - basic reported (p) |
|
|
13.1 |
10.3 |
10.0 |
11.6 |
12.3 |
Dividend (p) |
4.75 |
4.75 |
4.90 |
5.10 |
5.25 |
||
EBITDA Margin (%) |
5.9 |
5.9 |
5.5 |
5.5 |
5.6 |
||
Normalised Operating Margin |
4.7 |
4.1 |
3.9 |
3.9 |
4.0 |
||
BALANCE SHEET |
|||||||
Fixed Assets |
|
|
115.6 |
127.5 |
129.5 |
126.8 |
124.2 |
Intangible Assets |
42.2 |
41.2 |
41.2 |
41.1 |
41.0 |
||
Tangible Assets |
41.9 |
53.1 |
55.1 |
52.5 |
50.0 |
||
Investments & other |
31.5 |
33.1 |
33.1 |
33.1 |
33.1 |
||
Current Assets |
|
|
140.7 |
119.9 |
127.1 |
128.1 |
137.1 |
Stocks |
46.3 |
41.0 |
44.6 |
45.3 |
46.7 |
||
Debtors |
65.8 |
59.8 |
62.7 |
63.7 |
65.7 |
||
Cash & cash equivalents |
28.6 |
17.6 |
18.2 |
17.6 |
23.1 |
||
Other |
0.0 |
1.5 |
1.5 |
1.5 |
1.5 |
||
Current Liabilities |
|
|
(88.8) |
(70.8) |
(79.9) |
(76.8) |
(77.7) |
Creditors |
(63.9) |
(56.6) |
(68.7) |
(68.6) |
(69.5) |
||
Tax and social security |
(1.0) |
(0.0) |
(0.0) |
(0.0) |
(0.0) |
||
Short term borrowings* |
(23.9) |
(14.2) |
(11.2) |
(8.2) |
(8.2) |
||
Other |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Long Term Liabilities |
|
|
(36.6) |
(42.4) |
(42.4) |
(42.4) |
(42.4) |
Long term borrowings* |
(28.6) |
(36.2) |
(36.2) |
(36.2) |
(36.2) |
||
Other long-term liabilities |
(8.0) |
(6.2) |
(6.2) |
(6.2) |
(6.2) |
||
Net Assets |
|
|
131.0 |
134.2 |
134.2 |
135.7 |
141.2 |
Minority interests |
(16.7) |
(17.0) |
(18.6) |
(20.2) |
(21.8) |
||
Shareholders' equity |
|
|
114.3 |
117.1 |
115.6 |
115.5 |
119.4 |
CASH FLOW |
|||||||
Op Cash Flow before WC and tax |
23.8 |
23.4 |
24.2 |
24.7 |
25.7 |
||
Working capital |
(5.0) |
5.2 |
5.6 |
(1.8) |
(2.5) |
||
Exceptional & other |
(2.8) |
(6.0) |
(2.8) |
(2.8) |
(2.9) |
||
Tax |
(2.3) |
(3.1) |
(3.8) |
(2.7) |
(3.1) |
||
Operating cash flow |
|
|
13.7 |
19.6 |
23.2 |
17.3 |
17.1 |
Investment activities |
(4.2) |
(7.6) |
(10.5) |
(5.8) |
(5.8) |
||
Acquisitions/disposals |
(10.2) |
(2.7) |
(3.5) |
(3.5) |
0.0 |
||
Net interest |
(1.1) |
(1.5) |
(0.9) |
(1.0) |
(1.0) |
||
Equity financing |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Dividends |
(4.2) |
(3.3) |
(4.5) |
(4.6) |
(4.8) |
||
Other |
(0.6) |
0.8 |
0.0 |
0.0 |
0.0 |
||
Net Cash Flow |
(6.6) |
5.2 |
3.9 |
2.3 |
5.5 |
||
Opening net debt/(cash)* |
|
|
15.4 |
23.8 |
32.8 |
29.0 |
26.7 |
FX |
0.0 |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other non-cash movements |
(1.9) |
(14.3) |
0.0 |
0.0 |
0.0 |
||
Closing net debt/(cash)* |
|
|
23.8 |
32.8 |
29.0 |
26.7 |
21.1 |
Source: Company accounts, Edison Investment Research. Note: *Including IFRS16 leases.
|
|
Research: Healthcare
On 13 July Pixium announced a €8m capital increase, which addresses a nearer-term funding need and should enable the company to focus on continuing the ongoing PRIMAvera pivotal study. Net proceeds are expected to provide Pixium with sufficient additional funding to complete all the required implantations and follow-up visits as part of the PRIMAvera study to generate the necessary data required for a CE marking application in Europe. Pixium expects to be sufficiently funded through the end of 2022, which we believe removes a near-term funding gap overhang and may result in market participants placing greater attention on the Prima commercial opportunity and PRIMAvera data inflection point, rather than funding needs.
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