Carr’s trading update for the first 18 weeks of FY20 notes that while trading in Agriculture was lower than expected, primarily because of the mild UK weather, the strong Engineering pipeline should enable the group to meet management expectations for the year. Management also notes that a greater weighting than normal to the second half is likely. We leave our estimates unchanged and reiterate our indicative valuation of 190p/share.
Compared to FY19, demand for animal feed in the UK was depressed by the unseasonably mild weather which resulted in plentiful supplies of forage. The corresponding period in FY19 followed a prolonged period of drought, so while farmers typically started FY19 with very low stores of forage, levels were more normal at the start of FY20. Moreover, 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. Management does not expect this situation to improve during FY20. In the US, there was lower demand for feed blocks because of reduced cattle prices and a delayed start to winter feeding. However, higher cattle prices and better availability of forage could potentially benefit divisional performance during the remainder of FY20.
Contract phasing meant that Engineering had a slow start to the year. However, management anticipates that the strong pipeline, which includes a US$8.5m robotics contract from the US primarily for delivery in FY20, will result in full year divisional performance ahead of management’s previous expectations. Both the Global Robotics and the UK Service and Manufacturing businesses are expected to show y-o-y growth. The two significant Mechanical Stress Improvement Process contracts won by the US operation during FY19 will primarily benefit FY21.
Our DCF analysis derives an indicative value of 190p/share (unchanged). At the current share price, Carr’s is trading below its agricultural supply peers with regards to the mean EV/EBITDA multiple (7.8x vs 8.2x) and P/E multiple (9.9 vs 12.6x) for FY20e. Confirmation that the improvement in US cattle prices is sustainable plus news of further Engineering orders should, in our view, help close the valuation gap compared with the mean.