Carr’s Group — Confirmation of interim dividend

Carr’s Group (LSE: CARR)

Last close As at 23/11/2024

GBP1.14

−6.00 (−5.00%)

Market capitalisation

GBP108m

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Research: Industrials

Carr’s Group — Confirmation of interim dividend

Carr’s Group’s trading update for the 19 weeks ended 11 July 2020 notes that the company continues to trade in line with management expectations for FY20. The board is combining the two interim dividend payments this year into a single interim payment of 2.25p/share, equivalent to the two interim payments made in FY19. We leave our FY20 estimates unchanged but reduce our FY21 EPS estimate by 12% to reflect lower cattle prices in the US and weaker demand from the oil and gas industry, both related to the coronavirus pandemic.

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Industrials

Carr’s Group

Confirmation of interim dividend

Interim management statement

Basic materials

15 July 2020

Price

106p

Market cap

£98m

Net debt (£m) at end February 2020 excluding leases

25.4

Shares in issue

92.4m

Free float

61.1%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

0.5

5.4

(28.7)

Rel (local)

(0.6)

(1.3)

(14.6)

52-week high/low

160p

88p

Business description

Carr’s Group’s Agriculture division serves farmers in the North of England, South Wales, the Welsh Borders and Scotland, the US, Germany and New Zealand. The Engineering division offers remote handling equipment and fabrications to the global nuclear and oil and gas industries.

Next events

Prelims

23 November 2020

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

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

Carr’s Group’s trading update for the 19 weeks ended 11 July 2020 notes that the company continues to trade in line with management expectations for FY20. The board is combining the two interim dividend payments this year into a single interim payment of 2.25p/share, equivalent to the two interim payments made in FY19. We leave our FY20 estimates unchanged but reduce our FY21 EPS estimate by 12% to reflect lower cattle prices in the US and weaker demand from the oil and gas industry, both related to the coronavirus pandemic.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/18

403.2

17.7

15.2

4.5

7.0

4.2

08/19

403.9

18.9

15.6

4.8

7.0

4.5

08/20e

372.0

15.2

12.0

4.8

8.8

4.5

08/21e

382.5

16.6

13.4

4.9

7.9

4.6

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.

US cattle prices affected by meat packer closures

All of the division’s UK and overseas manufacturing facilities have remained operational throughout the pandemic, as has the network of UK retail outlets. Over the last 19 weeks trading has been ahead of expectations. After a temporary dip in average farmgate milk prices at the start of the lockdown, the UK livestock industry has operated as usual. The unseasonably dry weather at the start of the period followed by cooler than usual temperatures has inhibited forage growth and resulted in marginally higher demand for feeds, feed supplements and fuels. However, the closure of large meat processing plants in the US because of COVID-19 outbreaks has led to a drop in cattle prices which has adversely affected supplement sales in the region. Management expects that low US cattle prices and weak demand for supplements there will continue into FY21.

Low oil price affecting investment

The main UK engineering sites have remained operational and the US engineers have been able to continue their work from home. However, the lockdown has caused some temporary interruptions to nuclear and defence projects because personnel have not been able to visit customer sites. In addition, the low oil price caused by the pandemic has resulted in a reduction in investment from the oil and gas industry. Management expects that this situation will continue into FY21.

Valuation: Indicative valuation of 170p/share

Our DCF analysis gives an indicative value of 170p/share (previously 172p/share). At the current share price, Carr’s is trading below its peers with regards to mean EV/EBITDA (5.7x vs 7.7x) and mean P/E (8.8x vs 11.8x) multiples for the year ending August 2020. Confirmation that Carr’s diversified business model can address longer-term issues caused by the COVID-19 pandemic, clarity on post-Brexit UK trading arrangements from 2021 onwards and future UK farming subsidies, should, in our view, help move the share price back towards our indicative valuation.

Revisions to estimates

We have not changed our FY20 estimates because the overperformance in the agriculture division over the last 19 weeks balances the underperformance in the engineering division. Our FY20 estimates were revised down in March because the UK agricultural activities had been adversely affected by the mild winter that has depressed demand for feed and feed supplements and there were delays in receiving orders in the engineering division. We cut our FY20 and FY21 EPS estimates by 26% and 10% respectively at this point.

Exhibit 1: Estimate revisions

Year end 31 August (£m)

2019

2020e

2021e

2022e

Unchanged

Old

New

Change

Old

New

Change

Agriculture revenues

357.4

320.0

355.0

330.0

-7.0%

360.0

360.0

0.0%

Engineering revenues

46.5

52.0

57.6

52.5

-8.9%

58.8

58.8

0.0%

Group revenues

403.9

372.0

412.6

382.5

-7.3%

418.8

418.8

0.0%

Agriculture EBITA including JVs

14.7

11.4

13.8

12.8

-7.3%

14.1

14.1

0.0%

Engineering EBITA

5.9

5.9

7.0

6.0

-95.0%

7.1

7.1

0.0%

Group EBITA (after deducting share-based payments)

18.9

15.5

18.8

16.8

-10.4%

19.2

19.2

0.0%

Normalised PBT

18.9

15.2

18.5

16.6

-10.6%

18.9

18.9

0.0%

Normalised basic EPS (p)

15.6

12.0

15.2

13.4

-11.8%

15.6

15.6

0.0%

Dividend per share (p)

4.75

4.75

4.90

4.90

0.0%

5.10

5.10

0.0%

Net debt/(cash)

23.8

29.3

26.7

23.9

-10.5%

23.3

24.7

5.8%

Source: Company data, Edison Investment Research

We have changed our FY21 estimates to reflect:

Lower demand for feed supplements in the US because cattle prices are not expected to recover quickly because there is an oversupply of meat.

Lower investment from the oil and gas industry related to lower oil prices. This is likely to result in lower orders from this sector of the group’s UK manufacturing businesses.

We have not changed our FY22 estimates, though are mindful of the potential impact of sustained oil price weakness, depressed US cattle prices and a no-deal Brexit may have on the speed at which the group’s profits recover from FY20 levels.

Exhibit 2: Alternative presentation of adjusted PBT and EPS

Year end 31 August (£m)

FY20e

FY21e

FY22e

Edison normalised PBT

15.2

16.6

18.9

Share-based payments

(0.9)

(0.9)

(0.9)

PBT after deducting share-based payments

14.3

15.7

18.0

Tax (£m)

(2.5)

(2.6)

(3.0)

Minority interest

(1.6)

(1.6)

(1.6)

Net income after deducting share-based payments

10.2

11.5

13.5

Number of shares (m)

92.4

92.4

92.4

EPS after deducting share-based payments (p)

11.0

12.4

14.6

Edison normalised EPS (p)

12.0

13.4

15.6

Source: Edison Investment Research

Valuation

DCF methodology

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 170p/share (previously 172p/share). We prefer this metric because it looks beyond the short-term issues of unseasonal weather and delays to engineering orders that are specific to the group. The valuation gap should begin to close as investors gain confidence in the likelihood of a recovery in the agricultural division, which will be supported by better visibility on the length of the downturn in US cattle prices, post-Brexit trading arrangements in the UK from CY21 onwards and future UK farming subsidies. Positive news regarding contracts to replenish the order book for the German robotics business will also help push the share price upwards.

Exhibit 3: DCF valuation

  

Discount rate (post-tax, nominal)

9.0%

9.5%

10.0%

10.5%

11.0%

Terminal growth (%)

0.0%

177

166

156

147

138

1.0%

196

182

170

160

150

1.5%

208

192

179

167

157

2.0%

221

204

189

176

164

3.0%

253

231

212

196

182

Source: Edison Investment Research

Peer-based multiples

Exhibit 4: Calendarised peer-based multiples

ytd performance

Market cap

EV/EBITDA (x)

P/E (x)

Year 1 dividend

Name

(%)

(£m) 

2020e

2021e

2020e 

2021e 

yield (%)

ForFarmers

(1.5)

532.2

6.3

9.0

11.8

11.8

4.8

NWF Group

9.4

96.1

6.9

7.9

10.8

11.3

3.5

Origin Enterprises

(17.8)

344.4

12.1

9.0

11.7

7.4

1.1

Ridley Corporation

(26.7)

135.4

7.5

7.7

13.7

13.1

4.7

Wynnstay Group

0.8

61.1

5.6

5.0

10.8

9.3

4.7

Mean

7.7

7.7

11.8

10.6

3.8

Carr's Group @ current share price of 106p/share

(31.1)

98.0

5.7

5.4

8.8

7.9

4.5

Carr's Group @ Edison DCF of 170p/share

(31.1)

157.1

8.5

8.0

14.2

12.7

2.8

Source: Refinitiv, Edison Investment Research. Note: Prices at 9 July 2020

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 (106p), Carr’s is trading close to or below the bottom of the range for its peers on all metrics. In our opinion this is undeserved 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.

At the indicative value of 170p/share derived from our DCF calculation, Carr’s is trading at a substantial premium to its peers on all metrics. This is not surprising given that a DCF valuation looks at the long-term cash-generation profile rather than short-term profits.

At current levels, Carr’s Group offers a high dividend yield (4.5%), although this is in line with most of its peers. The fact that management has combined the deferred initial interim payment with the second interim dividend payment (typically the group pays two interim dividends) to give a single payment equal to the two interim dividends paid out in FY19 suggests that the total FY20 dividend will be maintained at FY19 levels. We note that current cash levels are ahead of the board’s expectations. Given that our estimates show an improvement in profitability in FY21, an increase in the dividend next year seems justified. FY21 dividend cover is 2.7x.


Exhibit 5: Financial summary

£m

2018

2019

2020e

2021e

2022e

Year end 31 August

IFRS

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

 

403.2

403.9

372.0

382.5

418.8

EBITDA

 

 

23.1

24.7

21.3

22.7

25.0

Operating Profit (before amor. and except.)

 

18.6

19.8

16.3

17.7

20.1

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

Share-based payments

(1.1)

(0.9)

(0.9)

(0.9)

(0.9)

Share of post-tax profits in JVs and associates

3.2

2.7

2.2

2.2

2.6

Reported operating profit

16.4

17.2

14.6

16.0

18.4

Net Interest

(0.9)

(0.9)

(1.2)

(1.2)

(1.2)

Profit Before Tax (norm)

 

 

17.7

18.9

15.2

16.6

18.9

Profit Before Tax (reported)

 

 

15.5

16.3

13.5

14.9

17.2

Reported tax

(1.9)

(2.7)

(2.5)

(2.6)

(3.0)

Profit After Tax (norm)

15.6

15.9

12.7

13.9

15.9

Profit After Tax (reported)

13.6

13.6

11.0

12.2

14.3

Minority interests

(1.8)

(1.6)

(1.6)

(1.6)

(1.6)

Net income (normalised)

13.9

14.3

11.1

12.4

14.4

Net income (reported)

11.9

12.0

9.4

10.7

12.7

Basic average number of shares outstanding (m)

91.4

91.8

92.4

92.4

92.4

EPS - normalised (p)

 

 

15.2

15.6

12.0

13.4

15.6

EPS - normalised fully diluted (p)

 

 

14.8

15.2

11.7

13.0

15.1

EPS - basic reported (p)

 

 

13.0

13.1

10.2

11.5

13.7

Dividend (p)

4.50

4.75

4.75

4.90

5.10

EBITDA Margin (%)

5.7

6.1

5.7

5.9

6.0

Normalised Operating Margin

4.6

4.9

4.4

4.6

4.8

BALANCE SHEET

Fixed Assets

 

 

96.5

115.6

115.7

115.7

115.8

Intangible Assets

26.5

42.2

42.6

42.9

43.3

Tangible Assets

38.7

41.9

41.6

41.3

41.0

Investments & other

31.4

31.5

31.5

31.5

31.5

Current Assets

 

 

134.7

140.7

135.8

137.9

144.5

Stocks

42.4

46.3

51.5

49.3

53.4

Debtors

67.5

65.8

64.2

66.1

72.4

Cash & cash equivalents

24.6

28.6

20.1

22.5

18.8

Other

0.1

0.0

0.0

0.0

0.0

Current Liabilities

 

 

(99.5)

(88.8)

(82.2)

(81.3)

(83.6)

Creditors

(64.3)

(63.9)

(60.3)

(62.5)

(67.7)

Tax and social security

(0.2)

(1.0)

(1.0)

(1.0)

(1.0)

Short term borrowings

(35.0)

(23.9)

(20.9)

(17.9)

(14.9)

Other

0.0

0.0

0.0

0.0

0.0

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

132.7

135.7

140.2

Minority interests

(15.7)

(16.7)

(18.3)

(19.9)

(21.5)

Shareholders' equity

 

 

105.3

114.3

114.4

115.8

118.7

CASH FLOW

Op Cash Flow before WC and tax

23.1

24.7

21.3

22.7

25.0

Working capital

(4.7)

(5.0)

(7.2)

2.5

(5.2)

Exceptional & other

(3.4)

(3.7)

(2.2)

(2.2)

(2.6)

Tax

(2.5)

(2.3)

(2.5)

(2.6)

(3.0)

Net operating cash flow

 

 

12.5

13.7

9.4

20.3

14.3

Investment activities

(2.8)

(4.2)

(5.8)

(5.8)

(5.8)

Acquisitions/disposals

(4.2)

(10.2)

(3.5)

(3.5)

(3.5)

Net interest

(1.0)

(1.1)

(1.2)

(1.2)

(1.2)

Equity financing

0.0

0.0

0.0

0.0

0.0

Dividends

(3.8)

(4.2)

(4.4)

(4.4)

(4.5)

Other

(0.6)

(0.6)

0.0

0.0

0.0

Net Cash Flow

0.1

(6.6)

(5.5)

5.4

(0.8)

Opening net debt/(cash)

 

 

14.1

15.4

23.8

29.3

23.9

FX

(0.3)

0.0

0.0

0.0

0.0

Other non-cash movements

(1.0)

(1.9)

0.0

0.0

0.0

Closing net debt/(cash)

 

 

15.4

23.8

29.3

23.9

24.7

Source: Company accounts, 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 £49,500 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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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 £49,500 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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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

1,185 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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