Carr’s Group — Weather affects H123 performance

Carr’s Group (LSE: CARR)

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Research: Industrials

Carr’s Group — Weather affects H123 performance

As flagged in its February update, the Speciality Agriculture division of Carr’s Group experienced a weaker trading environment from November onwards, while trading in the Engineering division was initially slower than anticipated. This resulted in a 23% drop in adjusted operating profit year-on-year in H123 to £5.8m. Management expects trading conditions for the Speciality Agriculture division to improve later this calendar year, while a strong Engineering order book supports good divisional performance in H223 and FY24. We downgrade our FY23 and FY24 adjusted PBT estimates by 5% for both years.

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Industrials

Carr’s Group

Weather affects H123 performance

H123 results

General industrials

2 May 2023

Price

127p

Market cap

£121m

Net cash (£m) at 4 March 2023 (excluding finance leases)

8.6

Shares in issue

95.1m

Free float

62.2%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.0

4.5

(13.0)

Rel (local)

(0.6)

3.9

(14.1)

52-week high/low

147p

92p

Business description

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

Next event

FY23 results

December 2023

Analysts

Anne Margaret Crow

+44 (0)20 3077 5700

David Larkam

+44 (0)20 3077 5700

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

As flagged in its February update, the Speciality Agriculture division of Carr’s Group experienced a weaker trading environment from November onwards, while trading in the Engineering division was initially slower than anticipated. This resulted in a 23% drop in adjusted operating profit year-on-year in H123 to £5.8m. Management expects trading conditions for the Speciality Agriculture division to improve later this calendar year, while a strong Engineering order book supports good divisional performance in H223 and FY24. We downgrade our FY23 and FY24 adjusted PBT estimates by 5% for both years.

Year
end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/21**

120.3

10.4

10.1

5.00

12.6

3.9

08/22

124.2

11.2

10.0

5.20

12.7

4.0

08/23e

148.2

10.0

8.6

5.40

14.8

4.3

08/24e

153.0

11.1

8.7

5.60

14.6

4.4

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.

Weather conditions affect H123 performance

During H123 feed block volumes were adversely affected by a continuation of the severe drought in parts of the United States and mild weather in the UK, as well as high farm input prices. Engineering performance was held back by unfavourable contract phasing and further delays on a long-running major defence project. Group adjusted operating profit fell by £1.7m year-on-year in H123 to £5.8m. While group revenues grew by 24% to £79.8m, this was the result of higher commodity prices. Engineering revenues rose by 4% to £22.6m.

Engineering order book supports FY24 recovery

The area affected by drought in the United States is significantly less than last year. In addition, UK farm input prices are reducing while farmgate beef, lamb and milk prices remain high, encouraging farmers to invest in feed blocks to boost output. Management therefore expects feed block volumes to recover in FY24. A strong Engineering order book supports good divisional performance in H223 and FY24. Noting the short-term external challenges for the Speciality Agriculture division, we downgrade our estimates for this division, while raising our Engineering estimates, resulting in a 5% adjusted PBT reduction at group level in both FY23 and FY24.

Valuation: Scope for uplift

Using a discounted cash flow (DCF) analysis with a 9.5% WACC and a 2.0% terminal growth rate gives an indicative value of 146p/share (previously 154p), which is a 25% premium to the current share price. We see scope for further uplift in indicative valuation as management invests the proceeds from the disposal of the Agricultural Supplies division in cash-enhancing acquisitions and in-house initiatives.

Divisional performance

Speciality Agriculture affected by high input costs and unfavourable weather

Divisional revenues increased by 34% y-o-y to £57.1m, while adjusted operating profit (including joint ventures) declined by £0.6m to £6.0m. The revenue increase was attributable to commodity price inflation, primarily of sugar cane molasses, which is the main ingredient of feed blocks. The division was able to pass on raw material costs, with selling prices increasing by an average of 35% year-on-year, but the total volume of feed blocks sold (excluding joint ventures) decreased by 13%. Faced with steep price increases for feed, fertiliser and diesel, UK livestock farmers cut back on discretionary expenditure, even though farmgate prices for dairy, beef and lamb were strong, a situation that typically encourages farmers to invest in feed blocks to enhance output. The mild autumn and winter also contributed to reduced demand. Farmers in the United States continued to be affected by a prolonged drought, which has resulted in a reduction in cattle numbers. The situation was exacerbated by the US beef industry reaching the low point of a 10-year production cycle. Since the division was able to pass on raw material prices, the gross profit per tonne of feed blocks sold was in line with historical averages and an improvement on H122, when delays in passing on price increases in full resulted in depressed gross profit per tonne. However, lower volumes on a relatively fixed cost base resulted in reduced overhead recovery.

Demand for feed blocks is typically lower over the summer and management notes that demand in both the United States and the UK is likely to be lower year-on-year during H223 because of the effects mentioned earlier, so we expect H223 divisional profit to be lower than H222 (£1.4m vs £2.7m). We reduce our FY23 divisional revenue estimate by £3.0m to £93.0m and our divisional EBITA estimate by £1.0m to £7.4m (See Exhibit 1).

The outlook for FY24 is much more positive. The area affected by drought in the United States has reduced significantly compared with a year previously and the US Department of Agriculture predicts that the number of beef cattle will start to rise again in CY24. Farm input prices in the UK and Ireland, especially for feed and fertiliser, are coming down, while farmgate prices remain strong. This should encourage farmers to invest in feed blocks and other supplements that improve daily liveweight gain and milk yield. In addition, management has instigated programmes to reduce costs at the UK animal health business and the US speciality protein business. Completion of the automation process in the UK animal health business should help achieve cost savings. We reduce our FY24 divisional revenue estimate by £6.7m to £96.0m and our divisional EBITA estimate by £0.9m to £8.0m.

Engineering affected by contract phasing

Engineering revenues increased slightly, by 4% to £22.6m, while adjusted operating profit dropped by £0.9m to £1.1m. Revenues from the Fabrication and Precision Engineering businesses increased by 27% year-on-year, supported by high activity levels in the nuclear reprocessing and decommissioning industry and strong order intake from the oil and gas sector. The Remote Handling and Robotics performance was weaker than the prior year, reflecting lower order intake in FY22. As anticipated, contract phasing in the US Engineering Solutions business meant that levels of activity there were lower than during the prior year period. In addition, the UK Engineering Solutions business experienced further delays on a major defence project. This project is almost complete and management expects the final acceptance tests to take place during H223.

Encouragingly, the order book strengthened during the period, from £40.6m at end FY22 to £41.3m at end H123 (4 March 2023) and then jumped to £57m at the end of April. Importantly, robotics orders are at record levels, including a £10m contract for the UK’s National Nuclear Laboratory. Moreover, the margin pressures and intense competition management commented on in February appear to have abated. Noting the strong order book, we raise our FY23 divisional revenue estimate by £1.2m to £55.2m and our divisional EBITA estimate by £0.5m to £5.7m. We raise our FY24 divisional revenue estimate by £0.8m to £57.0m and our divisional EBITA estimate by £0.3m to £5.8m.

Group performance

P&L

Group revenues grew by 24% y-o-y to £79.8m in H123, with higher commodity prices offsetting a reduction in feed block volumes. Adjusted operating profit fell by £1.7m to £5.8m. In addition to the reduction in profits in both divisions, central costs were £0.3m higher, reflecting the impact of inflationary pay increases and the costs of early settlement of borrowings. This should result in lower financing costs in H223 and FY24, though we are taking a prudent view and not modelling a reduction at present in case interest rates increase further. Net finance costs were £0.1m lower because higher interest rates were offset by lower borrowings once existing facilities were reduced by using consideration from the disposal of the Agricultural Supply division. The first interim dividend was maintained at 1.175p/share.

Balance sheet strengthened by Agricultural Supply disposal

The group moved from £14.0m net debt (excluding finance leases) to £8.6m net cash at the end of H123. The movement is primarily attributable to £24.3m cash received following the completion of the disposal of the Agricultural Supplies division in October 2022. Working capital increased by £1.6m as a reduction in inventory levels was offset by an increase in accounts receivable related to high selling prices. The retirement benefit surplus decreased by £1.0m during the period to £5.9m. The group no longer makes deficit reduction contributions because the pension scheme was fully funded at the last full actuarial valuation. Management is making progress on its potential full buy-out of the scheme.

Estimates

Exhibit 1: Revisions to estimates

£m

FY22

FY23e

FY24e

Actual

Old

New

Change

Old

New

Change

Speciality Agriculture revenues

78.1

96.0

93.0

-3.1%

102.7

96.0

-6.5%

Engineering revenues

46.2

54.0

55.2

2.2%

56.2

57.0

1.5%

Group revenues (£m)

124.2

150.0

148.2

-1.2%

158.9

153.0

-3.7%

Speciality Agriculture EBITA including JVs

9.2

8.4

7.4

-12.0%

8.9

8.0

-10.1%

Engineering EBITA

5.4

5.2

5.7

9.6%

5.5

5.8

5.5%

Central costs (£m)

(2.6)

(2.6)

(2.6)

0.0%

(2.3)

(2.3)

0.0%

Group EBITA after deducting share-based payments (£m)

11.9

10.9

10.4

-4.6%

12.1

11.5

-5.0%

Net finance costs

(0.7)

(0.4)

(0.4)

0.0%

-0.4

(0.4)

0.0%

Normalised PBT after deducting share-based payments (£m)

11.2

10.5

10.0

-4.7%

11.7

11.1

-5.2%

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

10.0

8.8

8.6

-2.7%

9.3

8.7

-6.2%

Dividend per share (p)

5.2

5.4

5.4

0.0%

5.6

5.6

0.0%

Net debt/(cash) including finance leases (£m)

21.6

(4.6)

(5.2)

12.1%

(11.3)

(12.4)

9.6%

Source: Company data, Edison Investment Research

We have revised our estimates of divisional performance as discussed as above. In addition, we have made the following changes:

We have changed the net cash received in FY23 from the disposal of the Agricultural Supply division to £25.0m, which is higher than the £24.3m received in H123, following management guidance that it expects additional receipts in H223.

We have updated the number of shares in issue.

We have revised the FY23 tax rate from 21.5% to 19.5% since a higher proportion of the profits are attributable to joint ventures, where the profits are added post-tax.

Valuation

SOTP analysis 

We base our sum-of-the-parts (SOTP) analysis (Exhibit 2) on the EBIT attributable to each remaining division, including the contribution from joint ventures (JVs) where appropriate, applying multiples derived from the peer comparison in Exhibit 3. The peer group for the Speciality Agriculture division is relatively small and diverse, so does not provide a definitive valuation. Anpario provides biological feed additives, Benchmark Holdings offers aquaculture biotechnology and Genus supplies pig, dairy and beef farmers with animals, semen or embryos carrying desirable characteristics for producing higher-quality meat and milk more efficiently. The Engineering division may struggle to command multiples similar to the peers listed above until investors can see that the margin pressures associated with the major defence contract have eased. Subject to these limitations, our calculation gives an indicative valuation of 215.5p/share (previously 235.6p). If we were to cut the Speciality Agriculture sample back to just Anpario, which is the closest peer with regards to products, this would apply a multiple of 15.0x to the Speciality Agriculture EBIT and give an indicative valuation of 183.0p, which is closer to our DCF valuation (see below).

Exhibit 2: SOTP analysis

FY23 EBIT
(£m)

Multiple
(x)

Value
(£m)

Speciality Agriculture

7.4

19.2

141.1

Engineering

5.7

13.4

76.1

Central costs

(2.6)

8.0

(20.9)

EV

10.4

196.3

Net cash at end H123

8.6

Equity value

204.9

Number of shares (m)

95.1

Indicative value per share (p)

215.5

Source: Refinitiv, Edison Investment Research

Exhibit 3: Peer multiples

Name

Market cap (£m)

EV/EBIT 1FY (x)

EV/EBIT 2FY (x)

P/E 1FY
(x)

P/E 2FY
(x)

Speciality Agriculture

Anpario

62.3

15.0

13.7

23.7

20.7

Benchmark Holdings

286.7

45.9

23.9

(118.7)

87.6

Genus

1,826.2

23.4

20.5

30.3

25.8

Mean

19.2

17.1

27.0

23.3

Engineering

Avingtrans

134.7

13.6

12.8

18.7

17.5

IMI

4,022.5

12.7

11.8

14.1

13.0

James Fisher and Sons

141.6

13.1

10.9

11.5

8.2

Weir Group

4,934.7

14.0

12.9

17.7

16.2

13.4

12.1

15.5

13.7

Source: Refinitiv. Note: Prices at 24 April 2023. Grey shading indicates exclusion from mean.

DCF methodology

The sample of Speciality Agriculture peers is small and the three companies in the sample have very divergent multiples. Moreover, the resultant indicative valuation is inflated by the inclusion of Genus, which offers very different products to the group’s Speciality Agriculture division. (Benchmark Holdings’ multiples are excluded from the calculation anyway.) We therefore prefer a DCF analysis. Using a 9.5% WACC and a 2.0% terminal growth rate gives an indicative value of 146p/share (previously 154p), which is a 25% premium to the current share price. An improvement in the UK agricultural trading environment and confirmation that the strong Engineering order book is converting to improved profits should help the share price rise towards this indicative value.

Exhibit 4: 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%

146

131

124

119

109

1.0%

160

142

134

127

115

1.5%

169

148

139

132

119

2.0%

179

155

146

137

123

3.0%

206

174

161

151

133

Source: Edison Investment Research

We see scope for further uplift in indicative valuation as management invests the proceeds from the disposal in cash-enhancing acquisitions and in-house initiatives.

Exhibit 5: Financial summary

£m

2021

2022

2023e

2024e

31-August

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

restated

restated

Revenue

 

 

120.3

124.2

148.2

153.0

EBITDA

 

 

14.9

16.0

14.5

15.5

Operating profit (before amort. and excepts.)

 

 

11.1

11.9

10.4

11.5

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

9.5

10.5

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

10.0

11.1

Profit Before Tax (reported)

 

 

7.5

7.6

9.1

10.1

Reported tax

(1.8)

(1.5)

(2.0)

(2.8)

Profit After Tax (norm) - continuing businesses

9.4

9.4

8.1

8.3

Profit After Tax (reported) - continuing businesses

5.7

6.0

7.1

7.3

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

7.1

7.3

Average Number of Shares Outstanding (m)

93.1

93.9

94.4

95.1

EPS - normalised (p)

 

 

10.1

10.0

8.6

8.7

EPS - normalised fully diluted (p)

 

 

9.9

9.9

8.5

8.6

EPS - basic reported (p)

 

 

6.2

6.4

7.6

7.7

Dividend (p)

5.00

5.20

5.40

5.60

EBITDA Margin (%)

12.4

12.9

9.8

10.1

Normalised Operating Margin

9.2

9.6

7.0

7.5

BALANCE SHEET

Fixed Assets

 

 

123.5

83.2

82.6

81.9

Intangible Assets

36.7

28.2

27.6

27.0

Tangible Assets

53.0

41.4

41.4

41.3

Investments & other

33.9

13.6

13.6

13.6

Current Assets

 

 

139.1

225.8

106.8

112.0

Stocks

43.2

27.0

27.2

27.4

Debtors

68.9

26.6

26.8

27.0

Cash & cash equivalents

24.3

22.5

46.2

51.0

Other

2.7

149.7

6.5

6.5

Current Liabilities

 

 

(87.0)

(139.9)

(34.7)

(33.0)

Creditors

(72.8)

(23.4)

(22.7)

(23.5)

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

119.4

125.6

CASH FLOW

Operating Cash Flow

14.9

16.0

14.5

15.5

Working capital

5.3

(8.7)

(1.1)

0.3

Exceptional & other

(2.1)

(2.8)

0.0

0.0

Tax

(1.3)

(0.8)

(2.0)

(2.8)

Net Operating Cash Flow

 

 

16.9

3.7

11.4

13.1

Investment activities

(3.0)

(4.0)

(4.3)

(4.3)

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)

(5.1)

Other

3.4

13.1

0.0

0.0

Net Cash Flow

10.8

7.2

26.7

7.2

Opening net debt/(cash) including finance leases

 

 

(32.8)

25.4

21.6

(5.2)

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)

 

 

25.4

21.6

(5.2)

(12.4)

Finance leases

15.4

7.5

7.5

7.5

Closing net debt/(cash) excluding finance leases

10.0

14.0

(12.7)

(19.9)

Source: Company data, Edison Investment Research

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This report has been commissioned by Carr’s Group and prepared and issued by Edison, in consideration of a fee payable by Carr’s Group Edison Investment Research standard fees are £60,000 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Paradigm Biopharma — Active pipeline and catalysts ahead

Paradigm has shared its March 2023 quarterly update. In Q323, net cash outflow from operating activities was A$10.3m (A$28.1m for the first nine months of FY23). R&D costs amounted to A$9.0m, attributed to ongoing recruitment and analytical activities for the PARA_OA_008 Phase II clinical trial assessing injectable pentosan polysulfate (iPPS, or Zilosul) as a potentially disease-modifying treatment for knee osteoarthritis (kOA), site operations for Phase II studies in mucopolysaccharidosis (MPS I and MPS VI), and ongoing NDA-enabling non-clinical studies. This expenditure is comparable to the prior quarter (A$13.2m), and we anticipate an increase in burn rate in the near-term to support the company’s active pipeline. With a cash position of A$73.2m at end-Q323 and at the current quarterly burn rate, management estimates that operations remain funded into CY24.

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