Carr’s Group — Order delay and weather affect FY20 performance

Carr’s Group (LSE: CARR)

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Research: Industrials

Carr’s Group — Order delay and weather affect FY20 performance

As flagged in an interim management statement in January, Carr’s Group’s UK agricultural activities have been adversely affected by the mild winter that has depressed demand for feed and feed supplements. Based on the order pipeline, management had expected this would be balanced by overperformance in the Engineering division, but delays in receiving orders will lead to underperformance here as well. We cut our FY20 and FY21 EPS estimates by 26% and 10% respectively and reduce our indicative valuation from 190p/share to 172p/share.

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Industrials

Carr's Group

Order delay and weather affect FY20 performance

Trading update

Basic materials

13 March 2020

Price

92.5p

Market cap

£85m

Net debt (£m) at end November 2019

29.7

Shares in issue

92.4m

Free float

63.3%

Code

CARR

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(41.9)

(43.0)

(44.1)

Rel (local)

(17.2)

(21.9)

(25.4)

52-week high/low

166.0p

89.5p

Business description

Carr’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 event

Interim results

15 April 2020

Analyst

Anne Margaret Crow

+44 (0)20 3077 5700

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

As flagged in an interim management statement in January, Carr’s Group’s UK agricultural activities have been adversely affected by the mild winter that has depressed demand for feed and feed supplements. Based on the order pipeline, management had expected this would be balanced by overperformance in the Engineering division, but delays in receiving orders will lead to underperformance here as well. We cut our FY20 and FY21 EPS estimates by 26% and 10% respectively and reduce our indicative valuation from 190p/share to 172p/share.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

08/18

403.2

17.7

15.2

4.50

6.1

4.9

08/19

403.9

18.9

15.6

4.75

5.9

5.1

08/20e

372.0

15.2

12.0

4.75

7.7

5.1

08/21e

412.6

18.5

15.2

4.90

6.1

5.3

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

Mild UK weather affects demand

As flagged in January, compared to financial H119, demand for animal feed in the UK during Carr’s FY H120 was depressed by the unseasonably mild weather that resulted in plentiful supplies of forage. Moreover, H119 followed a prolonged period of drought, so while farmers typically started H119 with very low stores of forage, levels were more normal at the start of H120. In addition, a combination of lower cattle prices, rising input prices and continuing Brexit uncertainty resulted in lower sales of supplements as farmers were not pushing to maximise outputs and lower sales of products related to infrastructure investment. In the US there was lower demand for feed blocks because of reduced cattle prices and a delayed start to winter feeding. Given the significant uncertainty in agricultural markets, management has begun to implement longer-term cost reduction measures to better position the division beyond the current financial year.

Contract delays impact Engineering performance

As previously flagged, contract phasing meant the Engineering division had a slow start to the year. In January management had anticipated the strong pipeline would result in full-year divisional outperformance. However, a major order from Japan for remote handling equipment was not closed as anticipated and is now not expected until Q121.

Valuation: Indicative valuation of 172p/share

Our DCF analysis gives an indicative value of 172p/share (previously 190p/share). At the current share price, Carr’s is trading below its peers with regards to the mean EV/EBITDA multiple (5.4x vs 6.6x) and P/E multiple (7.7x vs 10.8x) for FY20e. Confirmation that Carr’s diversified business model can address issues caused by Brexit uncertainty and climate change plus news of Engineering orders should, in our view, help move the share price back towards our indicative valuation.

Changes to estimates

Exhibit 1: Estimate changes

 

FY19

FY20e

FY21e

FY22e

 

Actual

Old

New

Change

Old

New

Change

Old

New

Change 

Agriculture revenues (£m)

357.4

378.2

320.0

-15.4%

382.0

355.0

-7.1%

385.8

360.0

-6.7%

Agriculture EBITA (£m)

13.6

13.7

10.2

-25.5%

14.1

12.6

-10.8%

14.3

12.8

-10.5%

Engineering revenues (£m)

46.5

56.4

52.0

-7.8%

57.6

57.6

0.0%

58.8

58.8

0.0%

Engineering EBITA (£m)

5.3

6.0

5.2

-12.1%

6.2

6.2

0.0%

6.4

6.4

0.0%

Group revenues (£m)

403.9

434.6

372.0

-14.4%

439.6

412.6

-6.1%

444.6

418.8

-5.8%

Adjusted PBT (£m)

18.9

19.4

15.2

-21.8%

20.0

18.5

-7.6%

20.4

18.9

-7.3%

EPS (p)

15.6

16.2

12.0

-25.8%

16.8

15.2

-9.8%

17.2

15.6

-9.4%

DPS(p)

4.75

4.90

4.75

-3.1%

5.1

4.9

-3.9%

5.3

5.1

-3.8%

Net (cash)/debt (£m)

23.8

29.0

29.3

0.9%

26.6

26.7

0.3%

22.0

22.0

0.0%

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 ascribed a value to the group that looks beyond the short-term issues and gives a fair value of 172p/share (previously 190p/share). The valuation gap should begin to close as investors see signs of a recovery in the Agricultural division which will depend on data on the cost-reduction programme and clarity on trading arrangements post-Brexit as well as positive news regarding contracts to replenish the order book for the German robotics business.

Exhibit 2: DCF valuation

 

 

Discount rate (post-tax, nominal)

 

172

9.0%

9.5%

10.0%

10.5%

11.0%

Terminal growth

0.0%

178

167

157

148

140

1.0%

197

184

172

161

151

1.5%

209

194

180

168

158

2.0%

222

205

190

177

165

3.0%

255

233

214

197

183

Source: Edison Investment Research

Peer-based multiples

Exhibit 3: Peer multiple analysis

Ticker

Name

Market cap

EV/EBITDA (x)

P/E (x)

(£m)

2020e

2021e

2020e

2021e

NWF.L

NWF Group PLC

84.6

6.1

6.1

11.0

10.8

OGN.I

Origin Enterprises PLC

511.7

7.1

6.9

8.6

8.4

RIC.AX

Ridley Corporation Ltd

178.9

7.3

6.3

15.0

12.2

WYWYN.L

Wynnstay Group PLC

55.7

5.9

5.4

8.6

7.5

Mean

6.6

6.2

10.8

9.7

CARRC.L

Carr's Group PLC at 92.5p/share

85.5

5.4

4.8

7.7

6.1

Carr's Group PLC at 172.0p/share

158.9

9.0

8.1

14.3

11.3

Source: Refinitiv, Edison Investment Research. Prices at 12 March 2020

In Exhibit 3 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. We note the shares of all four peers have fallen substantially in recent weeks. At the current share price (92.5p), and on our revised estimates, Carr’s is trading below its peers on all metrics. In our opinion this is undeserved. Firstly, Carr’s derives around one-third of its profits from engineering related activities. While divisional performance this year has been affected by contract delays, it is likely to recover next year, regardless of what happens in the UK agricultural sector. Secondly, 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 172p/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.

Exhibit 4: Financial summary

£m

2018

2019

2020e

2021e

2022e

Year-end August

PROFIT & LOSS

Revenue

 

 

403.2

403.9

372.0

412.6

418.8

EBITDA

 

 

19.9

22.1

20.3

22.7

23.0

Operating Profit (before amort. and except.)

 

 

18.6

19.8

16.3

19.7

20.1

Amortisation of acquired intangibles

(0.3)

(0.8)

(0.8)

(0.8)

(0.8)

Share-based payments

(1.1)

(0.9)

(0.9)

(0.9)

(0.9)

Exceptionals

(0.8)

(0.9)

0.0

0.0

0.0

Share of post-tax profits in JVs and associates

3.2

2.7

1.0

1.9

2.0

Operating Profit

16.4

17.2

14.6

18.0

18.4

Net Interest

(0.9)

(0.9)

(1.2)

(1.2)

(1.2)

Profit Before Tax (norm)

 

 

17.7

18.9

15.2

18.5

18.9

Profit Before Tax (FRS 3)

 

 

15.5

16.3

13.5

16.8

17.2

Tax

(1.9)

(2.7)

(2.5)

(2.9)

(3.0)

Profit After Tax (norm)

15.6

15.9

12.7

15.6

16.0

Profit After Tax (FRS 3)

13.6

13.6

11.0

13.9

14.3

Minority interest

(1.8)

(1.6)

(1.6)

(1.6)

(1.6)

Net income (norm)

13.9

14.3

11.1

14.0

14.4

Net income (FRS 3)

11.9

12.0

9.4

12.3

12.7

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

15.2

15.6

EPS - normalised fully diluted (p)

 

 

14.8

15.2

11.7

14.8

15.1

EPS - FRS 3 (p)

 

 

13.0

13.1

10.2

13.3

13.7

Dividend per share (p)

4.5

4.75

4.75

4.9

5.1

EBITDA Margin (%)

4.9

5.5

5.5

5.5

5.5

Operating Margin (before GW and except.) (%)

4.6

4.9

4.4

4.8

4.8

BALANCE SHEET

Fixed Assets

 

 

96.5

115.6

115.7

115.8

115.9

Intangible Assets

26.5

42.2

42.6

42.9

43.3

Tangible Assets, Deferred tax assets and Pension surplus

70.0

73.4

73.1

72.9

72.6

Current Assets

 

 

134.7

140.7

135.8

144.1

147.1

Stocks

42.4

46.3

51.5

53.1

53.4

Debtors

67.7

65.8

64.2

71.2

72.3

Cash

24.6

28.6

20.2

19.8

21.4

Current Liabilities

 

 

(99.5)

(88.8)

(81.0)

(84.4)

(82.4)

Creditors including tax, social security and provisions

(64.5)

(64.9)

(60.1)

(66.6)

(67.6)

Short term borrowings

(35.0)

(23.9)

(20.9)

(17.9)

(14.9)

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)

Retirement benefit obligation

0.0

0.0

0.0

0.0

0.0

Other long term liabilities

(5.8)

(8.0)

(8.0)

(8.0)

(8.0)

Net Assets

 

 

121.0

131.0

134.0

138.9

144.0

Minority interest

(15.7)

(16.7)

(17.7)

(18.7)

(19.7)

Shareholders equity

 

 

105.3

114.3

116.2

120.2

124.2

CASH FLOW

Operating Cash Flow

 

 

15.0

16.0

11.9

20.4

22.7

Net Interest

(1.0)

(1.1)

(1.2)

(1.2)

(1.2)

Tax

(2.5)

(2.3)

(2.5)

(2.9)

(3.0)

Investment activities

(2.8)

(4.2)

(5.8)

(5.8)

(5.8)

Acquisitions/disposals

(4.2)

(10.2)

(3.5)

(3.5)

(3.5)

Equity financing and other financing activities

(0.1)

0.6

0.0

0.0

0.0

Dividends

(3.8)

(4.2)

(4.4)

(4.4)

(4.5)

Net Cash Flow

0.5

(5.4)

(5.5)

2.6

4.6

Opening net debt/(cash)

 

 

14.1

15.4

23.8

29.3

26.7

HP finance leases initiated

0.0

0.0

0.0

0.0

0.0

Other

1.7

3.0

0.0

0.0

0.0

Closing net debt/(cash)

 

 

15.4

23.8

29.3

26.7

22.0

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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General disclaimer and copyright

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

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Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

Copyright: Copyright 2020 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2020. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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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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JPMorgan Global Growth & Income — Global ‘best ideas’ portfolio paying c 4% yield

JPMorgan Global Growth & Income (JGGI) seeks capital growth from a portfolio of c 50–90 attractively valued stocks drawn from the best ideas of J.P. Morgan Asset Management’s (JPMAM’s) large team of research-driven global equity analysts. The portfolio is managed by the new team of Helge Skibeli, Raj Tanna and Tim Woodhouse (co-manager alongside Jeroen Huysinga, who retired in Q219). While recent returns have inevitably been hit by the global stock market sell-off, JGGI’s NAV total return of +9.5% is ahead of the benchmark MSCI AC World index (+8.8%) over 12 months to 29 February 2020, and broadly in line over one, three and six months. The trust also seeks to reward investors through a high distribution policy, paying out c 4% of the previous year-end NAV in quarterly instalments.

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