Carr’s Group — Sale puts focus on higher-margin activities

Carr’s Group (LSE: CARR)

Currency in GBP

Last close As at 25/01/2023

GBP1.22

5.50 (4.74%)

Market capitalisation

GBP109m

Research: Industrials

Carr’s Group — Sale puts focus on higher-margin activities

Carr’s Group has announced the disposal of its Agricultural Supplies division for up to £44.5m cash following the strategic review announced in January 2022. While we expect the disposal to lead to an earnings reduction in the short term, the proceeds will be reinvested in the Speciality Agriculture and Engineering divisions. Management believes this strategy will generate faster growth in the longer term than retaining the Agricultural Supplies activity.

Anne Crow

Written by

Anne Margaret Crow

Director, TMT & Industrials

Industrials

Carr’s Group

Sale puts focus on higher-margin activities

Disposal of Agricultural Supplies division

General industrials

31 August 2022

Price

130.0p

Market cap

£122m

Net debt (£m) at end February 2022 (excluding finance leases and funds from disposal)

29.9

Shares in issue

94.0m

Free float (before disposal)

57.2%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.7)

(6.6)

(18.5)

Rel (local)

(1.2)

(2.9)

(17.0)

52-week high/low

165.0p

125.0p

Business description

Carr’s Group’s Speciality Agriculture division serves farmers in the UK, Ireland, the United States, Germany, Canada and New Zealand. The Engineering division offers remote handling equipment and fabrications to the global nuclear and oil and gas industries.

Next events

EGM

19 September 2022

FY22 results

November 2022

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

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

Carr’s Group has announced the disposal of its Agricultural Supplies division for up to £44.5m cash following the strategic review announced in January 2022. While we expect the disposal to lead to an earnings reduction in the short term, the proceeds will be reinvested in the Speciality Agriculture and Engineering divisions. Management believes this strategy will generate faster growth in the longer term than retaining the Agricultural Supplies activity.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/20**

395.6

15.0

12.0

4.75

10.8

3.7

08/21

417.3

16.6

13.2

5.00

9.8

3.8

08/22e

474.6

17.3

12.7

5.20

10.2

4.0

08/23e

138.2

10.5

8.8

5.40

14.8

4.2

Note: FY20, FY21 and FY22e include the Agricultural Supplies division, which has not been treated as a discontinued business. *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Restated.

Aggregate consideration 6.4x historical EBITDA

The initial consideration payable is £43m, which, after adjustments for debt (less c £19.2m), working capital (plus c £6.5m) and deferred payments (less c £4m), is expected to generate initial cash proceeds of £26.4m. There is also a contingent consideration of up to £1.5m, based on performance, of which up to £0.7m is achievable within one year of completion of the disposal. Management expects that transaction costs will be c £1.9m and the group must also make a £0.4m contribution to the group pension scheme, giving net aggregate cash proceeds of c £29.6m. The sale is to Edward Billington & Son, which already has a significant stake in the division. It is subject to shareholder approval.

Proceeds reinvested in more profitable divisions

Management intends to reinvest up to £10m of the proceeds in Speciality Agriculture manufacturing capacity and up to £4m in working capital to enable the Engineering division to fund potential new larger and longer-term contracts. It also intends to make targeted acquisitions that diversify the activity of the Speciality Agriculture division. The disposal takes the group out of a market where there is overcapacity and little scope for differentiation. It will remove the significant build-up in working capital at the half-year stage and avoid the need to invest an estimated £10m in enhancements to meet more stringent operating regulations.

Valuation: Releasing the underlying value

Our sum-of-the-parts (SOTP) calculation, which compares the two remaining divisions with listed peers offering speciality products to livestock farmers and a sample of UK engineering companies, gives a value of 210.7p/share. Now that there is no excuse for valuing the group using companies engaged in the supply of more commoditised inputs to livestock farmers, the share price should, in our opinion, start to move towards the indicative value, particularly once management has been seen to reinvest the proceeds from the disposal into the Speciality Agriculture division.

Changes to estimates

We make the following changes to our estimates to reflect the impact of the disposal:

Receipt of initial consideration of £43m less £1.9m transaction costs, £4m deferred payment and £19.2m adjustment for debt.

Elimination of £19.2m debt including £10.0m finance leases, which we model as a reduction in long-term borrowings.

Payment of £0.4m into the pension fund, which we show as ‘Investments and other’ in the balance sheet.

As per the pro-forma net assets statement in the transaction circular, we reduce goodwill by £5.1m, property, plant and equipment by £7.8m, right of use assets by £9.9m, remove the investment in the associate and cut the interest in joint ventures (JVs) by £2.6m.

Reduction of working capital at end FY23 by £25.0m. This is less than the reduction shown in the pro-forma net assets statement, which shows the situation at the end of the first half, which is the peak of the Agricultural Supplies working capital cycle.

Elimination of minority interests.

Although the disposal will not complete until after an extraordinary general meeting on 19 September 2022, we model it taking effect at the end of FY22, ie at the end of August 2022.

Exhibit 1: Revisions to estimates

£m

FY21

FY22e

FY23e

Actual

Old

New

Change

Old

New

Change

Speciality Agriculture revenues

68.5

77.1

73.1

-5.1%

76.7

74.7

-2.6%

Agricultural Supplies revenues

297.5

345.5

355.5

2.9%

339.9

0.0

-100.0%

Engineering revenues

51.3

55.0

46.0

-16.4%

62.0

63.5

2.4%

Group revenues

417.3

477.6

474.6

-0.6%

478.6

138.2

-71.1%

Speciality Agriculture EBITA including JVs

9.5

7.6

7.6

0.0%

8.3

8.0

-3.6%

Agricultural Supplies EBITA including JVs

6.7

7.3

8.8

20.6%

7.5

0.0

-100.0%

Engineering EBITA

3.9

5.6

3.8

-32.1%

5.9

6.6

11.9%

Central costs

(2.6)

(2.2)

(1.9)

30.0%

(2.7)

(3.0)

-30.0%

Group EBITA after deducting share-based payments

17.6

18.3

18.3

0.0%

18.9

11.5

-39.1%

Normalised PBT after deducting share-based payments

16.6

17.3

17.3

0.0%

17.9

10.5

-41.2%

Normalised undiluted EPS after deducting share-based payments (p)

13.2

12.7

12.7

0.0%

12.9

8.8

-31.9%

Dividend per share (p)

5.0

5.2

5.2

0.0%

5.4

5.4

0.0%

Net debt/(cash)

25.4

33.6

33.2

-1.1%

27.3

(10.1)

N/A

Source: Carr’s Group data, Edison Investment Research

In addition, we make some minor adjustments to reflect the trading update issued earlier in August and reiterated in the circular accompanying the disposal:

A reduction in our FY22 and FY23 Speciality Agriculture revenue estimates and FY23 EBITA estimate to reflect the ongoing drought in the United States.

An increase in our FY22 Agricultural Supplies revenue estimate to reflect continued high commodity prices and in our FY22 EBITA estimate to acknowledge outperformance versus management expectations as the market fully absorbed sharp rises in commodity prices.

A reduction in our FY22 Engineering revenue and EBITA estimates to reflect the impact of supply chain delays and higher costs than management completing a major nuclear defence project. An increase in our divisional FY23 revenues and EBITA estimates to acknowledge the strong order book.

Valuation

SOTP analysis

In Exhibit 2 we compare Carr’s FY22 EV/EBIT and P/E multiples with those of its listed peers offering speciality products to livestock farmers (Speciality Agriculture), companies engaged in the supply of more commoditised inputs to livestock farmers (Agricultural Supply) and a sample of UK engineering companies. At the current share price (130.0p), Carr’s is trading at a relatively modest discount to our sample of companies engaged in agricultural supply and our sample of engineering companies for all metrics. The level of discount is much more pronounced when comparing Carr’s with the mean for the sample of companies offering speciality agricultural products. This suggests that Carr’s current share price does not attribute any uplift in value compared with agricultural suppliers such as Wynnstay for its Speciality Agriculture division.

Exhibit 2: Peer-based multiples

Name

Market cap (£m)

EV/EBIT 1FY (x)

EV/EBIT 2FY (x)

P/E 1FY (x)

P/E 2FY (x)

Speciality Agriculture

Anpario

138.9

20.1

18.1

25.3

24.0

Benchmark Holdings

291.6

105.7

32.1

(49.7)

40.7

Mean

20.1

25.1

25.3

32.3

Agricultural Supply

ForFarmers

229.8

12.9

10.3

9.1

8.2

NWF Group

116.6

10.4

10.4

12.4

12.6

Ridley Corporation

378.9

10.9

10.0

16.1

14.4

Wynnstay Group

132.1

9.1

11.7

10.0

12.8

Mean

10.8

10.6

11.9

13.3

Engineering

!

Avingtrans

145.2

14.9

13.2

20.6

17.8

IMI

3,051.8

11.3

10.7

11.6

10.9

James Fisher and Sons

167.0

11.9

9.8

10.3

8.0

Weir Group

3,805.6

13.8

12.5

16.0

14.2

Mean

13.0

11.5

14.6

12.7

Carr's Group @ 130p/share

122.2

8.9

N/A

10.3

N/A

Source: Refinitiv, Edison Investment Research. Note: Prices at 30 August 2022. Grey shading indicates exclusion from mean.

We base our SOTP analysis (Exhibit 3) on the EBIT attributable to each remaining division, including the contribution from JVs where appropriate, applying multiples derived from the peer comparison in Exhibit 2. Obviously, this is a relatively small peer group, so does not provide a definitive valuation. For example, Anpario is heavily focussed on the monogastric market (eg pigs and poultry) and Benchmark offers aquaculture biotechnology, so both of our speciality agriculture peers serve markets that are growing more quickly than the ruminant market, which Carr’s addresses. We do not believe it is realistic for the group’s engineering division to command multiples similar to the peers listed above until investors can see that the negative effect of completing the major nuclear project has gone away. Subject to these limitations, our calculation gives an indicative valuation of 210.7p/share.

Exhibit 3: SOTP analysis

FY22 EBIT (£m)

Multiple (x)

Value (£m)

Speciality Agriculture

7.6

20.1

153.1

Agricultural Supply

0.0

10.8

0.0

Engineering

3.8

13.0

49.3

Central costs

(1.9)

8.0

(15.2)

EV

187.2

Net debt at end February 2022

(29.9)

Minority interest following disposal

0.0

Initial proceeds from disposal (before adjustment for debt and working capital)

43.0

Transaction costs

(1.9)

Pension transfer

(0.4)

Equity

198.0

Number of shares (m)

94.0

Indicative value per share (p)

210.7

Source: Refinitiv, Edison Investment Research

Now that there is no excuse for basing the group’s valuation on listed agricultural supply companies such as Wynnstay Group, the share price should, in our opinion, start to move towards the indicative value, particularly once management has been seen to reinvest the proceeds from the disposal into acquisitions that build up the Speciality Agriculture division.

Exhibit 4: Financial summary

£m

2020

2021

2022e

2023e

31-August

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

restated

Revenue

 

 

395.6

417.3

474.6

138.2

Share of post-tax profit from JVs and associate

0.0

0.0

0.0

0.0

EBITDA

 

 

23.4

23.9

24.8

18.0

Operating profit (before amort. and excepts.)

 

16.3

17.6

18.3

11.5

Amortisation of acquired intangibles

(1.4)

(1.2)

(1.2)

(1.2)

Exceptionals

(2.6)

(3.4)

0.0

0.0

Reported operating profit

12.3

13.0

17.1

10.4

Net Interest

(1.3)

(1.0)

(1.0)

(1.0)

Profit Before Tax (norm)

 

 

15.0

16.6

17.3

10.5

Profit Before Tax (reported)

 

 

10.9

12.1

16.1

9.4

Reported tax

(1.3)

(2.4)

(3.5)

(2.3)

Profit After Tax (norm)

12.7

14.7

13.8

8.3

Profit After Tax (reported)

9.6

9.7

12.6

7.1

Minority interests

(1.2)

(1.9)

(1.9)

0.0

Net income (normalised)

11.1

12.3

11.9

8.3

Net income (reported)

8.4

7.7

10.7

7.1

Average Number of Shares Outstanding (m)

92.3

93.1

93.9

94.0

EPS - normalised (p)

 

 

12.0

13.2

12.7

8.8

EPS - normalised fully diluted (p)

 

 

11.8

13.0

12.5

8.7

EPS - basic reported (p)

 

 

9.1

8.3

11.4

7.5

Dividend (p)

4.75

5.00

5.20

5.40

EBITDA Margin (%)

5.9

5.7

5.2

13.0

Normalised Operating Margin

4.1

4.2

3.8

8.3

BALANCE SHEET

Fixed Assets

 

 

124.4

123.4

120.3

77.5

Intangible Assets

38.4

36.7

35.5

29.1

Tangible Assets

53.1

53.0

51.1

31.5

Investments & other

32.9

33.7

33.7

16.8

Current Assets

 

 

120.4

139.1

148.0

85.6

Stocks

41.0

43.2

52.0

18.8

Debtors

59.8

68.9

79.8

29.4

Cash & cash equivalents

17.6

24.3

13.5

34.6

Other

2.1

2.7

2.7

2.7

Current Liabilities

 

 

(70.8)

(86.1)

(83.9)

(23.7)

Creditors

(56.6)

(72.0)

(72.8)

(15.6)

Tax and social security

(0.0)

(0.0)

(0.0)

(0.0)

Short term borrowings including finance leases

(14.2)

(14.1)

(11.1)

(8.1)

Other

0.0

0.0

0.0

0.0

Long Term Liabilities

 

 

(42.4)

(41.2)

(41.2)

(22.0)

Long term borrowings including finance leases

(36.2)

(35.6)

(35.6)

(16.4)

Other long term liabilities

(6.2)

(5.6)

(5.6)

(5.6)

Net Assets

 

 

131.6

135.2

143.2

117.3

Minority interests

(16.8)

(17.2)

(19.1)

0.0

Shareholders' equity

 

 

114.8

118.1

124.1

117.3

CASH FLOW

Operating Cash Flow

23.4

23.9

24.8

18.0

Working capital

5.2

3.2

(18.8)

26.4

Exceptional & other

(7.4)

(4.9)

0.0

(25.0)

Tax

(3.1)

(2.1)

(3.5)

(2.3)

Net Operating Cash Flow

 

 

18.2

20.0

2.5

17.1

Investment activities

(6.2)

(3.6)

(4.6)

(4.6)

Acquisitions/disposals

(2.7)

(1.1)

0.0

17.9

Net interest

(1.5)

(1.1)

(1.0)

(1.0)

Equity financing

0.0

0.9

0.0

0.0

Dividends

(3.3)

(5.5)

(4.7)

(4.9)

Other

0.8

0.3

0.0

(0.4)

Net Cash Flow

5.2

9.9

(7.8)

24.1

Opening net debt/(cash)

 

 

23.8

32.8

25.4

33.2

FX

0.0

0.0

0.0

0.0

Other non-cash movements

(14.3)

(2.5)

0.0

19.2

Closing net debt/(cash)

 

 

32.8

25.4

33.2

(10.1)

Finance leases

13.9

15.4

15.4

5.4

Closing net debt/(cash) excluding finance leases

18.9

10.0

17.8

(15.6)

Source: Company data, Edison Investment Research. Note: *Including Agricultural Supplies division. **Because there is no pro-forma information on shareholder equity, this is subject to change as information becomes available.


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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

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Kinarus has announced that it has dosed the first patient in its Phase II KINFAST study evaluating lead candidate KIN001 in mild or moderate COVID-19 patients in an outpatient setting. KINFAST is a placebo-controlled study that is designed to recruit c 400 patients across multiple sites in Switzerland and Germany. Interim data are expected after the enrolment of c 140 patients, which we anticipate should help guide KIN001’s future development as a potential treatment for COVID-19.

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