Carr’s Group — Initial look at FY22 performance

Divisional revenues increased by 14.0% y-o-y to £78.1m while adjusted operating profit (including joint ventures; JVs) declined by 3.5% to £9.2m. The revenue increase was attributable to commodity price inflation. Overall, the volume of feed blocks declined by 2% (including JVs). Volume sales grew marginally in the UK as although livestock and farmgate milk prices in the UK remained strong, a situation that typically encourages farmers to invest in feed blocks and supplements to enhance farm outputs, the high prices of inputs such as fertiliser caused farmers to limit discretionary purchases such as feed blocks. A 2% volume reduction in the US (including JVs) related to the drought affecting the northern part of the country and the resultant reduction in cattle numbers. The modest drop in profit reflects lower utilisation of the feed block plant serving the northern US throughout the year and a reduction in margin during H122 because of a lag in passing through increases in raw material prices in both the UK and the US. The margin situation stabilised during H222, with increases in both feed block prices and input costs. Divisional EBITA (including JVs) was higher than our £7.6m estimate because of a strong finish to the year in the UK, probably attributable to high farmgate milk prices in the UK. Divisional revenues were higher than our £73.1m estimate because of continued commodity price rises.

While H123 started strongly, trading became more challenging during November and December 2022, with lower volumes of feed blocks sold in the US because of the continued drought affecting the northern states and in the UK markets because of the mild weather. We model a year-on-year drop in EBITA during FY23 to £8.4m to reflect the weaker trading environment in November and December, though this still represents an increase to our previous estimate (£8.0m), which took a very cautious stance on margins that have recovered (see Exhibit 1 below for a summary of the changes to estimates). The 23% y-o-y revenue growth to £96.0m assumes that commodity prices continue to be high. Our FY24 estimates assume an improvement in product volumes supported by an initiative to promote sales of equine feed blocks in Texas, which has the largest horse population in the US, and continued growth in demand for a range of feed blocks for dairy cows, which was launched in the UK in CY21. In addition, revenues (medium term) and margins (shorter term) should benefit from the completion of the automation project at Animax, which will increase capacity while reducing production costs. 

Engineering revenues declined by 11.0% to £46.2m while adjusted operating profit jumped by 38.2% to £5.4m. The Engineering division benefited from a strong performance from the specialist fabrication business, which experienced a positive flow of orders from the nuclear reprocessing and decommissioning industry and from improved utilisation levels. The recovery in the oil and gas market, following the disruption caused by the COVID-19 pandemic, helped the precision engineering business rebuild its order book, resulting in improved performance. The Remote Handling and Robotics performance was weaker than the prior year against a strong comparator. Global shortages of components such as motor controllers meant that the business was not able to recognise milestone payments against some contracts during H122. As anticipated, although both the UK and US Engineering Solutions businesses had won major contracts during FY21, contract phasing meant that levels of activity for the US business were lower during H122 than during the prior year period. In addition, there were delays and higher costs associated with a major defence project, and delays on a service contract for the nuclear industry following a technical fault. Nevertheless, the division finished the year strongly, reaching some milestones on fabrication projects towards the year end, resulting in full year EBITA ahead of our £3.8m estimate (revenues were in line with our estimate).

While H123 started strongly, trading became more challenging during November and December 2022 because of intensifying competitive activity as new players entered the fabrication market. In the medium term, management expects that the Joint Supply Chain Accreditation Register (JOSCAR) accreditation will help the fabrication business secure high-margin work in the UK defence, aerospace and security sectors, which its new competitors will not be qualified to work on. In late CY22, the precision engineering business gained the ‘Fit for Nuclear’ quality accreditation, enabling it to tender for contracts in the nuclear industry with other companies in the division, and reducing the business’s dependence on the oil and gas industry. In the short term, however, although there will not be a repeat of the delays on one Engineering Solutions contract during FY23 because that contract is now complete, and the global oil price is supporting precision engineering activity, we now model a modest year-on-year reduction in divisional performance during FY23, whereas we had previously modelled a sharp increase. We model a modest improvement in divisional profit during FY24 to reflect the fabrication business winning more work in the nuclear industry. 

The recent trading update on the FY22 results presents key performance metrics for the group but not full financial details because the auditor has a small number of supplementary information requests outstanding. These performance metrics for FY21 and FY22 treat the Agricultural Supplies division as a discontinued activity. The ‘Actual’ columns in Exhibit 1 show group revenues, adjusted EBITA, adjusted PBT, net finance charges, adjusted EPS and DPS from the trading update. The trading update also discloses reported EBIT, PBT and undiluted EPS. All these adjusted and reported numbers are used in the FY21 and FY22 P&L section of the Financial summary in Exhibit 5.

Group revenues grew by 3.3% y-o-y to £124.2m in FY22, with higher commodity prices offsetting a small reduction in feed block volumes and lower revenues from the engineering division. Adjusted operating profit increased by 7.5% to £11.9m. The strong recovery in the Engineering division was partly offset by a reduction in profits from the Speciality Agriculture division and higher central costs. The full-year dividend was raised by 4% to 5.2p per share.

The recent trading update contains a summary of the key elements of the balance sheet. Crucially, it presents all of the assets and liabilities associated with the Agricultural Supply division as an asset for disposal. We reproduce the data from the trading update in Exhibit 2 and use this information as the basis for our balance sheet presentation in the Financial summary table. Note that Exhibit 2 shows a decrease in working capital between end-FY21 and end-FY22. This is because the value at the end of FY21 includes working capital associated with the Agricultural Supply division, while the value at the end of FY22 does not. The trading update also shows a cash flow summary for FY22, which we reproduce in its entirety in the Financial summary except for splitting out interest and tax paid. The FY21 cash flow shown in the Financial summary is derived from the reported FY21 accounts.

Net debt (excluding finance leases totalling £7.5m) increased by £4.0m during FY22 to £14.0m at the year-end. The movement is primarily attributable to an £8.7m increase in working capital for the continuing businesses, which reflects the strong finish to FY22 and consequent rise in receivables, as well as high commodity prices and a build-up in inventory to support the strong performance at the start of H123.

We changed our group FY23 estimates in late August 2022 to reflect the disposal of the Agricultural Supplies division. We make additional changes as follows:

We introduce FY24 estimates. The assumptions regarding divisional performance are discussed above. In addition, we make the following assumptions:

In August 2022 management announced that, following its strategic review, it was going to sell the Agricultural Supplies division to Edward Billington & Son, which already had a significant stake in the division. The disposal completed in October. In the trading update, management advised that the anticipated net proceeds after accounting for all transaction costs, debt and working capital adjustments would be £29.0m. This includes £4.0m deferred payment, which should be received in FY24 and £1.0m deferred contingent consideration, which we exclude from our estimates.

We expect the disposal to lead to an earnings reduction in the short term. However, the proceeds will be reinvested in the Speciality Agriculture and Engineering divisions. Management intends to reinvest up to £10.0m of the proceeds in Speciality Agriculture manufacturing capacity and up to £4.0m 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 £10.0m in enhancements to meet more stringent operating regulations. Management believes this strategy will therefore generate faster growth in the longer term than retaining the Agricultural Supplies activity. 

Peter Page moved from non-executive chair to an executive role in October 2021 while the group looked for a new CEO. In August 2022, the group announced that Peter was to stay in an executive role, following which he became CEO on 21 February 2023. Prior to becoming non-executive chairman in January 2020, Peter was chief executive officer of Devro, which manufactures collagen casings for the food industry. Before that, he worked for poultry breeder Aviagen and as an executive director of Adnams, a regional brewer.

David White joined the group on 3 January 2023 and became CFO on 21 February 2023 when Neil Austin, who had been in the post since May 2013, stood down. David has spent the previous 16 years in a variety of senior finance roles at international provider of mobile power solutions Aggreko. Between 2018 and late 2021, David was finance director of the Global Products and Technology division and, until mid-2022, he served as a senior adviser to the company. David has significant international experience, having helped establish new operations for Aggreko in the Middle East and serving as Aggreko’s general manager in the Gulf region, a $100m turnover business with 200 employees in five countries.

Tim Jones became non-executive chair on 21 February 2023. Tim served as non-executive chair of Treatt, the London Stock Exchange-listed manufacturer of natural extracts and ingredients between 2012 and January 2023. Tim is also chair of Allia Charitable Group, a social impact financier and catalyst, which he initially joined as CEO in 2002. In 2022, Tim was appointed chair of SP-Logistics Holdings, a multinational clinical-trials logistics organisation trading as the Oximio Group.

We base our SOTP analysis (Exhibit 4) on the EBIT attributable to each remaining division, including the contribution from JVs where appropriate, applying multiples derived from the peer comparison in Exhibit 3. Obviously, this is a relatively small peer group, so does not provide a definitive valuation. For example, Anpario is heavily focused 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. The engineering division may struggle to command multiples similar to the peers listed above until investors can see that the current margin pressures on some fabrication projects have eased. Subject to these limitations, our calculation gives an indicative valuation of 205.1p/share.  

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.