Diversification both inside and outside the agriculture sector means that Carr’s Group continues to trade in line with management expectations for FY19 despite the unusually mild UK winter and spring. We leave our estimates and indicative valuation of 184p per share unchanged.
As flagged at the AGM and interims, mild weather in the UK throughout the winter and spring resulted in lower demand for feed blocks, feed, fuel and animal health products. However, the mild spring promoted grass growth, driving demand for silage wrap, fertiliser and tractor fuel, which partly offsets the negative trends. Management is mitigating any adverse impact on profitability through improved efficiencies and better procurement. US feed block volumes continue to rise as penetration of the eastern states of the US increases following the commissioning of the low-moisture feed block plant in Tennessee in January 2018. Looking forward, management typically invests in acquisitions post-completion. In the case of Animax, acquired in September 2018, it is investing in automation to add capacity and extending the product range to include boluses for larger livestock.
The UK Manufacturing business continued to perform well as it worked on a strong order book backed by long-term contracts from the nuclear industry and a buoyant oil and gas market. While the remote handling business was relatively quiet, with most of the revenues from the $8.5m US contract not being realised until FY20, this was offset by higher than anticipated activity in the US as NuVision worked on two significant Mechanical Stress Improvement Process contracts extending to FY21. Work has started on the project for 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. The recent acquisition of NW Total Engineered Solutions takes the group into the nuclear defence segment.
Our DCF analysis gives an indicative value of 184p per share (unchanged). At the current share price, Carr’s is trading below its peers on mean EV/EBITDA (6.1x vs 8.1x) and mean P/E (9.3x vs 13.1x) 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.