Carr’s Group has announced the acquisition of Cumbria-based NW Total Engineered Solutions for a total cash consideration of up to £9.6m. The acquisition fulfils management’s ambition of taking the Engineering division into the nuclear defence segment. We expect it will be earnings enhancing from FY20 onwards and raise our indicative valuation from 182p/share to 184p/share.
NW Total designs and manufactures bespoke process equipment packages and provides onsite technical support, installation and condition monitoring services to the nuclear defence, nuclear power generation and decommissioning markets. The acquisition enhances the Engineering division’s offer for the nuclear industry, adding specialist services such as condition monitoring and staff authorised to work on highly regulated sites such as Sellafield. The deal extends the customer base in the UK and provides opportunities for cross-selling, with NW Total designing complex fabrications such as pressure vessels and heat exchangers and the existing UK businesses manufacturing them. The former owners will remain with the business post-acquisition. As with previous acquisitions, Carr’s intends to invest in the newly acquired business, recruiting staff to support business development and drive operating efficiency improvements.
The initial consideration payable is £6.0m, with a performance-related deferred consideration of up to £3.6m payable over the next three years. The initial consideration will be funded by an additional term loan facility of £6.0m, with the deferred element self-financed. For the year ended March 2019, NW Total reported £9.1m revenues and £1.5m profit before tax. Despite the costs associated with the additional staff, management expects the acquisition to be earnings enhancing in its first full year of ownership.
Our DCF analysis gives an indicative value of 184p/share (previously 182p/share). At the current share price, Carr’s is trading below its peers with regards to mean EV/EBITDA (6.3x vs 8.2x) and mean P/E (9.6x vs 13.3x) for the year ending August 2020. Clarity on trading arrangements post-Brexit (although Carr’s Group’s geographic reach and diversity reduces exposure to restrictions on lamb exports) and news of further contracts to replenish Wälischmiller’s order book should, in our view, help close the valuation gap compared with the mean.