Last month's half-year results scotched the market's fears that oil price weakness would deliver a major blow to Carr's (CARR) energy-focused engineering business. But the shares nevertheless continue to trade at a lowly rating, creating a buying opportunity.
- Historically low valuation
- Diversified business
- Strong balance sheet
- New flour mill yielding results
- US business growth
- Weak dairy prices
- Geopolitical uncertainty rocking oil and gas
Carr's three rather different operating divisions - agriculture, food and engineering - tend to offer each other support during trying times and so it has proved recently. Not only do the market's fears for Carr's engineering business seem overblown, but there are a number of reasons to be upbeat: a new flour mill is yielding fine returns and the global feed blocks business is going great guns. Add to that a strong balance sheet that could support acquisitions, and the historically low rating of the shares looks misplaced.
When Carr's reported half-year results last month it delivered record profits, despite challenging trading conditions. That snuffed out rumours that the group might have to issue a profit warning this year. Agriculture, which represents roughly 60 per cent of group profits and supplies nutrient feed blocks for livestock, continues to grow nicely with operating profits 3 per cent ahead at £8.5m. Demand is particularly good in the US, where Carr's feed blocks are winning market share. In particular, it expects AminoMax, a rumen bypass protein for dairy cattle, to forge ahead Stateside, well into 2016. Carr's is also enjoying lower production costs following investment into its UK and US-based feed manufacturing facilities. A further US-based plant is being redeveloped, the benefits of which will be felt in 2016. Admittedly, lower milk prices are squeezing dairy farmers in the UK and putting them off purchasing higher priced feeds. But long-term prospects are solid, and volumes in the UK are still ahead of last year.
| CARR'S (CARR) | ||||
|---|---|---|---|---|
| ORD PRICE: | 162p | MARKET VALUE: | £145m | |
| TOUCH: | 161-164p | 12-MONTH HIGH: | 192p | LOW: 123p |
| FORWARD DIVIDEND YIELD: | 2.3% | FORWARD PE RATIO: | 11 | |
| NET ASSET VALUE: | 93p | NET DEBT: | 27% | |
| Year to 30 Aug | Turnover (£m) | Pre-tax profit (£m) | Earnings per share* (p) | Dividend per share* (p) |
|---|---|---|---|---|
| 2012 | 404 | 13.1 | 9.8 | 2.9 |
| 2013 | 468 | 15.4 | 12.0 | 3.2 |
| 2014 | 429 | 16.6 | 12.6 | 3.4 |
| 2015** | 413 | 17.5 | 13.8 | 3.7 |
| 2016** | 428 | 17.9 | 14.1 | 3.8 |
| % change | +4 | +2 | +2 | +3 |
Normal market size: 1,500 Matched bargain trading Beta: 0.18 *Adjusted to account for 10-for-one share split in January 2015 **Investec forecasts, adjusted EPS figures | ||||
Over at the food business, the new Kirkcaldy flour mill is probably the most high-tech in the country and is really boosting profitability. First-half profits were up 18 per cent to £1.7m. Kirkcaldy could also yield significant contract wins with food producer customers. The portside locations of all three of Carr's mills means that when UK wheat harvests are depressed, they can easily source stock from overseas to keep the mills operating at full capacity.
Tougher conditions in engineering were seen in a 13 per cent profit fall to £1.6m, but this was hardly a disaster. Geopolitical uncertainty in some key regions means profit growth will be held back this year, too, but the division has benefited from the fact that nuclear work, rather than oil and gas, makes up the lion's share of business. Here, the group continues to win contracts, and believes nuclear activity will soon ramp up in the UK. Finally, Carr's low debt affords for acquisitions. It has made a number of purchases in the past, including several last year, and has made no secret of its desire to continue bolting on small deals.
