The recovery in both US feed block sales and the UK manufacturing businesses noted at Carr’s Group’s AGM in January has continued throughout H118. This has resulted in a 22% improvement in adjusted PBT year-on-year and a slight over-performance compared with management’s expectations. H218 has started well, so we raise our estimates and adjust our indicative valuation from 167p/share to 169p/share.
The positive trends noted at the AGM in January continued for the remainder of H118. Group revenues rose by 13.2% year-on-year to £200.1m. This reflected a recovery in the US feed block activity linked to an improvement in cattle prices and in the UK manufacturing businesses, as work progressed on the major contract that had been delayed right until the end of FY17. In addition, sentiment in the UK farming sector continued to be positive and the remote handling businesses benefited from strong order books relating to the global nuclear industry. Preexceptional PBT grew by 22.0% to £10.9m. The integration of NuVision, the US engineering company acquired in August 2017, is progressing well.
H118 operating profit was slightly ahead of management expectations because of the level of demand for agricultural inputs in the UK. In addition, the strengthened management at the UK precision machining business enabled it to take advantage of the improved sentiment in the oil and gas industry. H218 has started well. Prices currently paid to UK farmers for livestock and milk are supporting demand for feed, feed blocks, machinery and other agricultural inputs. Engineering performance is underpinned by long-term contracts from the global nuclear industry. We raise our estimates slightly to reflect these positive developments.
Our updated DCF analysis gives an indicative value of 169p/share (previously 167p). At the current share price, Carr’s is trading below its peers with regards to mean EV/EBITDA (7.4x vs 8.7x) and mean P/E (10.7x vs 12.9x) for the year ending August 2018. Continued recovery in the US feed block market and further confirmation of the Engineering upturn should help close the valuation gap.