Carr’s trading update for the first 18 weeks of FY19 indicates that both divisions are performing well. As the group is trading in line with management’s expectations for the full year, we leave our estimates and indicative valuation of 182p/share unchanged.
US feed block volumes continued to rise as the cattle price recovery has been maintained and penetration of the eastern states of the US has increased following the commissioning of the low moisture feed block plant in Tennessee in January 2018. UK farming sentiment remains positive. Although demand for fuel and animal health products for cattle being kept indoors was lower because of the mild autumn, trading overall was in line with management expectations. The integration of Animax, acquired in September 2018, with its complementary animal health product portfolio is progressing well.
The UK Manufacturing order book, which includes long-term contracts from the nuclear industry, is strong. The recent $8.5m US contract for remote handling equipment from the German business demonstrates the benefits of working with NuVision (acquired August 2017) and helps top up Wälischmiller’s order book following completion of the substantial Chinese orders in FY18. NuVision’s own order book benefitted from two significant Mechanical Stress Improvement Process contracts, won during the summer, which extend to FY21. Funding from the US Department of Energy to develop a small-scale working prototype of NuVision’s passive cooling technology, which is intended to prevent a repeat of the Fukushima tragedy, potentially opens a new product area longer-term.
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 (6.8x vs 8.0x) and mean P/E (10.5x vs 12.1x) for the year ending August 2019. Clarity on trading arrangements post-Brexit and news of Engineering orders should help close the valuation gap, in our view.