After posting a record first half profit before tax, Carr’s interim management statement notes that the group continues to trade in line with expectations. Management’s strategy of innovation, investment and internationalisation continues to deliver growth, despite pressure on dairy farm incomes in the UK. We leave our estimates broadly unchanged and reiterate our sum-of-the parts valuation of 203p/share.
Global feed block sales were up year-on-year. Demand in the US is rising as herds are rebuilt following the recovery from the prolonged drought and Carr’s has taken market share following commissioning of its low-moisture feed block plant in Iowa in July 2014. Further US market gains are anticipated when the low-moisture block line in Nevada is commissioned this autumn. UK feed volumes grew, although low farmgate milk prices negatively affected feed margins and sales of high-margin AminoMax, which helps boost milking cows’ productivity. Retail sales continued to grow, supported by a new Country Store opening in Selkirk in March. We expect further growth arising from a new store in Rothbury, which opened in July, and the acquisition in June of Reid & Robertson, which has a country store and two satellite outlets, strengthening the group’s presence in West Scotland
The flour division continues to attract new customers requiring the highest levels of flour quality, food safety and service levels. The division’s geographic footprint is currently providing some protection from the supermarket sliced bread wars. In the Engineering division, Bendalls, Carrs MSM and Wälischmiller are benefiting from recovery in the UK nuclear market. This is helping offset subdued demand from customers in the oil and gas industry, which has adversely affected Chirton. Bendalls continues to work on the £9m contract to deliver 33 pressure vessels for the BP Shah Deniz gas pipeline in Azerbaijan.
We revise our revenue estimates downwards to reflect movement in commodity prices by c £30m, to £400.0m (FY15) and £405.9 (FY16), but on expected margin strength we leave profit estimates unchanged. Our sum-of-the-parts analysis gives fair value at 203p/share. Triggers to close the valuation gap include an improvement in farmgate milk prices (even though Carrs is less affected by this than its peers) and additional engineering contracts, and further acquisitions.