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GBP69m
Research: Industrials
External factors, US drought and excessive input prices, in the Speciality Agriculture business continue to weigh on volumes. As these reverse, strong market positions should help to drive activity back towards historical levels. With the Engineering division performing well the medium-term outlook is far more encouraging than the short-term market issues may suggest.
Carr’s Group |
Weaker agriculture markets affect expectations |
Trading update |
General industrials |
7 August 2023 |
Share price performance
Business description
Next event
Analyst
Carr’s Group is a research client of Edison Investment Research Limited |
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External factors, US drought and excessive input prices, in the Speciality Agriculture business continue to weigh on volumes. As these reverse, strong market positions should help to drive activity back towards historical levels. With the Engineering division performing well the medium-term outlook is far more encouraging than the short-term market issues may suggest.
Year end |
Revenue (£m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
08/21** |
120.3 |
10.4 |
10.1 |
5.00 |
12.4 |
4.0 |
08/22 |
124.2 |
11.2 |
10.0 |
5.20 |
12.5 |
4.2 |
08/23e |
145.2 |
8.0 |
6.7 |
5.20 |
18.7 |
4.2 |
08/24e |
151.0 |
9.7 |
7.8 |
5.30 |
16.1 |
4.2 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments. **Restated to treat Agricultural Supply as a discontinued business.
Agriculture softer but Engineering robust
The Speciality Agriculture business reported a softer first half, with US volumes down 10% due to drought conditions and UK volumes down 20% due to significant price increases leading farmers to increase outside grazing and reduce feed block purchases. These trends have continued, with August, a key month for the group, expected to be particularly weak, leading to lower expectations for the full financial year. Management’s expectation is for a slight improvement next year, particularly if US herds start to recover. The Engineering division continues to perform in line with management guidance with the order book providing 18 months’ visibility, suggesting upside to FY24. The central costs are also expected to be slightly higher in the current financial year due to the acceleration of the ‘transition service agreement’ associated with the Billington Group, which is now expected to be completed earlier, suggesting some reduction in FY24, albeit with inflationary pressures they are unlikely to quickly return to previously expected levels. We expect the group to finish the year with strong cash position, albeit with some impact from the lower profitability and increased working capital to support the Engineering division, as previously announced. The group is paying a second interim dividend of 1.175p, we forecast the full year dividend to be held at 5.2p.
CEO succession
Peter Page has agreed not to seek re-election at the next AGM, which is expected in February 2022. He became non-executive chairman in January 2020, interim executive chairman in October 2021 and CEO in February 2023.
Valuation and changes to forecasts
Our DCF valuation (with a WACC of 9.5% and a long-term growth rate of 2.0%) comes to 153p. We have reduced our forecasts as follows: FY23 underlying PBT from £10.0m to £8.0m (-20.3%) and underlying EPS from 8.4p to 6.7p (-20.3%). FY24 underlying PBT from £11.1m to £9.7m (-12.0%) and underlying EPS from 8.8p to 7.8p (-12.0%).
Changes to forecasts
Exhibit 1: Key forecast changes
£m |
FY23e |
FY24e |
||||
Old |
New |
Change |
Old |
New |
Change |
|
Speciality Agriculture revenues |
93.0 |
90.0 |
-3.2% |
96.0 |
92.0 |
-4.2% |
Engineering revenues |
55.2 |
55.2 |
0.0% |
57.0 |
59.0 |
3.5% |
Group revenues |
148.2 |
145.2 |
-2.0% |
153.0 |
151.0 |
-1.3% |
Speciality Agriculture EBITA including JVs |
7.4 |
6.1 |
-17.0% |
8.0 |
6.5 |
-18.8% |
Engineering EBITA |
5.7 |
5.5 |
-3.5% |
5.8 |
6.5 |
12.1% |
Central costs |
(2.6) |
(3.2) |
22.6% |
(2.3) |
(2.9) |
22.6% |
Group EBITA after deducting share-based payments |
10.4 |
8.4 |
-19.5% |
11.5 |
10.1 |
-11.6% |
Net finance costs |
(0.4) |
(0.4) |
0.0% |
-0.4 |
(0.4) |
0.0% |
Normalised PBT after deducting share-based payments |
10.0 |
8.0 |
-20.3% |
11.1 |
9.7 |
-12.0% |
Normalised undiluted EPS (p) |
8.4 |
6.7 |
-20.3% |
8.8 |
7.8 |
-12.0% |
Dividend per share (p) |
5.4 |
5.2 |
-3.7% |
5.6 |
5.3 |
-5.4% |
Net debt/(cash) |
(5.0) |
(3.2) |
-36.0% |
(12.3) |
(9.9) |
-19.1% |
Source: Edison Investment Research
Valuation
Our valuation is based on a discounted cash flow (DCF) to accommodate the two different operating divisions. Exhibit 2 shows our DCF valuation per share relative to the cost of capital (WACC) and terminal growth rate assumptions. Using a 9.5% WACC and a 2.0% terminal growth rate gives an indicative value of 153p/share.
Exhibit 2: DCF valuation (p/share) – sensitivities to WACC and terminal growth assumptions
Discount rate (post-tax, nominal) |
||||||
8.0% |
9.0% |
9.5% |
10.0% |
11.0% |
||
Terminal growth |
0.0% |
160 |
143 |
136 |
130 |
120 |
1.0% |
176 |
155 |
147 |
139 |
127 |
|
1.5% |
185 |
162 |
153 |
145 |
131 |
|
2.0% |
196 |
170 |
160 |
151 |
135 |
|
3.0% |
226 |
190 |
177 |
165 |
146 |
|
Source: Edison Investment Research
Exhibit 3: Financial summary
£m |
2021 |
2022 |
2023e |
2024e |
||
Year end 31 August |
IFRS |
IFRS |
IFRS |
IFRS |
||
INCOME STATEMENT |
||||||
Revenue |
120.3 |
124.2 |
145.2 |
151.0 |
||
EBITDA |
14.9 |
16.0 |
12.5 |
14.2 |
||
Operating profit (before amort. and excepts.) |
11.1 |
11.9 |
8.4 |
10.1 |
||
Amortisation of acquired intangibles |
(1.2) |
(0.9) |
(0.9) |
(0.9) |
||
Exceptionals |
(1.7) |
(2.7) |
0.0 |
0.0 |
||
Reported operating profit |
8.2 |
8.2 |
7.5 |
9.2 |
||
Net Interest |
(0.7) |
(0.7) |
(0.4) |
(0.4) |
||
Exceptionals |
0.0 |
0.0 |
0.0 |
0.0 |
||
Profit Before Tax (norm) |
10.4 |
11.2 |
8.0 |
9.7 |
||
Profit Before Tax (reported) |
7.5 |
7.6 |
7.1 |
8.8 |
||
Reported tax |
(1.8) |
(1.5) |
(1.7) |
(2.4) |
||
Profit After Tax (norm) - continuing businesses |
9.4 |
9.4 |
6.3 |
7.3 |
||
Profit After Tax (reported) - continuing businesses |
5.7 |
6.0 |
5.3 |
6.4 |
||
Profit after tax of discontinued operations |
3.8 |
4.0 |
0.0 |
0.0 |
||
Loss on disposal of discontinued operations |
0.0 |
(6.2) |
0.0 |
0.0 |
||
Reported profit for the year including discontinued operations |
9.6 |
1.1 |
5.3 |
6.4 |
||
Average Number of Shares Outstanding (m) |
93.1 |
93.9 |
94.0 |
94.0 |
||
EPS - normalised (p) |
10.1 |
10.0 |
6.7 |
7.8 |
||
EPS - normalised fully diluted (p) |
9.9 |
9.9 |
8.5 |
8.6 |
||
EPS - basic reported (p) |
6.2 |
6.4 |
5.7 |
6.8 |
||
Dividend (p) |
5.00 |
5.20 |
5.20 |
5.30 |
||
EBITDA Margin (%) |
12.4 |
12.9 |
8.6 |
9.4 |
||
Normalised Operating Margin |
9.2 |
9.6 |
5.8 |
6.7 |
||
BALANCE SHEET |
||||||
Fixed Assets |
123.5 |
83.2 |
82.1 |
80.9 |
||
Intangible Assets |
36.7 |
28.2 |
27.6 |
27.0 |
||
Tangible Assets |
53.0 |
41.4 |
40.9 |
40.3 |
||
Investments & other |
33.9 |
13.6 |
13.6 |
13.6 |
||
Current Assets |
139.1 |
225.8 |
103.7 |
108.8 |
||
Stocks |
43.2 |
27.0 |
26.7 |
27.0 |
||
Debtors |
68.9 |
26.6 |
26.3 |
26.7 |
||
Cash & cash equivalents |
24.3 |
22.5 |
44.3 |
48.6 |
||
Other |
2.7 |
149.7 |
6.5 |
6.5 |
||
Current Liabilities |
(87.0) |
(139.9) |
(34.2) |
(32.7) |
||
Creditors |
(72.8) |
(23.4) |
(22.3) |
(23.2) |
||
Tax and social security |
(0.0) |
(0.7) |
(0.7) |
(0.7) |
||
Short term borrowings including finance leases |
(14.1) |
(14.2) |
(11.2) |
(8.8) |
||
Other |
0.0 |
(101.6) |
(0.1) |
(0.1) |
||
Long Term Liabilities |
(41.2) |
(35.3) |
(35.3) |
(35.3) |
||
Long term borrowings including finance leases |
(35.6) |
(29.9) |
(29.9) |
(29.9) |
||
Other long term liabilities |
(5.6) |
(5.4) |
(5.4) |
(5.4) |
||
Net Assets |
134.6 |
133.7 |
116.3 |
121.7 |
||
CASH FLOW |
||||||
Operating Cash Flow |
14.9 |
16.0 |
12.5 |
14.2 |
||
Working capital |
5.3 |
(8.7) |
(1.8) |
0.1 |
||
Exceptional & other |
(2.1) |
(2.8) |
0.0 |
0.0 |
||
Tax |
(1.3) |
(0.8) |
(1.7) |
(2.4) |
||
Net Operating Cash Flow |
16.9 |
3.7 |
8.9 |
11.8 |
||
Investment activities |
(3.0) |
(4.0) |
(3.8) |
(3.8) |
||
Acquisitions/disposals |
(1.1) |
(0.4) |
25.0 |
4.0 |
||
Net interest |
(0.8) |
(0.8) |
(0.4) |
(0.4) |
||
Equity financing |
0.9 |
0.4 |
0.0 |
0.0 |
||
Dividends |
(5.5) |
(4.7) |
(4.9) |
(4.9) |
||
Other |
3.4 |
13.1 |
0.0 |
0.0 |
||
Net Cash Flow |
10.8 |
7.2 |
24.8 |
6.7 |
||
Opening net debt/(cash) including finance leases |
(32.8) |
25.4 |
21.6 |
(3.2) |
||
FX |
0.0 |
0.0 |
0.0 |
0.0 |
||
Other non-cash movements |
(69.0) |
(3.3) |
0.0 |
0.0 |
||
Closing net debt/(cash) inc finance leases |
25.4 |
21.6 |
(3.2) |
(9.9) |
||
Finance leases |
15.4 |
7.5 |
7.5 |
7.5 |
||
Closing net debt/(cash) excluding finance leases |
10.0 |
14.0 |
(10.8) |
(17.5) |
Source: Company data, Edison Investment Research
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