Once again, Carr’s diversified model has enabled it to deliver profit growth despite well-publicised issues in the UK agriculture sector. Pre-exceptional PBT grew by 4.5% to £11.4m as a flat result from the Agriculture division was enhanced by a year-on-year performance improvement in Engineering. Group H119 revenues rose by 3.0% year-on-year to £206.2m, reflecting commodity price inflation and sales from Animax, which was acquired in September 2018. Noting this resilience, we leave our estimates and valuation unchanged.
Growth in the US feed block market and the Engineering division more than offset reduced volumes of feed, feed blocks, fuel and animal health products caused by the mild autumn and winter in the UK and lower revenues from sales of machinery. Machinery sales are linked to farmer confidence, which weakened recently because of continued uncertainty over Brexit. Net debt rose by £7.9m during the period to £23.3m. As well as the seasonal increase in working capital, there was £4.7m (net) paid out for Animax.
Second-half performance is typically dominated by the Engineering division, as farmers require less feed and other inputs during the summer. Prospects here are positive as the order books for the UK manufacturing and US Engineering businesses are at record levels. Looking further out, the $8.5m contract won by the German engineering business in the US bodes well for awards from the US in the future and underpins capacity utilisation during FY20.
Our DCF analysis gives an indicative value of 182p/share (unchanged). At the current share price, Carr’s is trading below its peers with regards to mean EV/EBITDA (6.5x vs 8.8x) and mean P/E (10.0x vs 14.6x) for the year ending August 2019. Carr’s share price dropped by 13% following Wynnstay’s profits warning in March, which was attributable to uncertainty over Brexit affecting UK farmer confidence, particularly over future lamb exports. Carr’s share price has completely recovered since then as investors have recognised how Carr’s more diversified business means it is less affected by factors influencing UK farming. Confirmation that Carr’s diversified business model can continue to address issues caused by Brexit uncertainty plus news of further Engineering orders should, in our view, help close the valuation gap compared with the mean.