Carr’s Group – a robust balance sheet and undervalued upside

This group has been a real laggard to date but I now reassess its prospects.

I was casting an eye over some of my Profile non-performers and this company appears to me to be worth a lot more than the current market valuation.

The business

I am hoping that the Annual General Meeting, to be held tomorrow for the Carlisle-based Carr’s Group (LON:CARR), might impart some good news to help improve its rating.

This is not a whizz-bang fintech stock, nor a flash pharma one either, instead it is a £147m capitalised group that is actually making profits, despite facing pandemic issues.

Corporate history

The company was established by Jonathan Dodgson Carr in 1831 as a baker and dealer in meal and flour.
To supply the baking business, he set up his first flour mill in 1834.

Diversification into the animal feed business came shortly after WWII.

The group went public in 1972 and it subsequently acquired its first engineering business in 1996. Some twenty years later the company disposed of its entire shareholding in Carr’s Flour Mills.

August 2017 saw the acquisition of NuVision Engineering, a US-based world-renowned technology and engineering company.

Further corporate expansion was seen in September 2018, with the acquisition of Animax, a manufacturer of market-leading livestock trace element supplementation products.

A year later the group acquired NW Total Engineered Solutions, a service and manufacturing company serving the nuclear defence, nuclear decommissioning, nuclear power generation and other highly regulated markets, such as the utilities, pharmaceuticals and energy sectors.

Today

Carr’s describes itself as an international leader in manufacturing value added products and solutions, with market leading brands and robust market positions in Agriculture and Engineering, supplying customers in over 50 countries around the world.

It operates a decentralised business model that empowers its operating subsidiaries to be competitive, agile, and effective in their individual markets whilst setting overall standards and goals.
It derives 84.3% of its £417.3m sales revenues from the UK, some 11.5% from the US, 3.8% from Europe, and New Zealand 0.4%.

Speciality Agriculture

Its Speciality Agriculture division manufactures and supplies molasses feed blocks, minerals and boluses (large vet pills) containing trace elements and minerals for livestock.

It has operations in the UK, Germany and the US.

This division handled £68.5m (16.4%) of the group’s £417.3m revenues in the year to end August 2021, making a £9.5m operating profit.

Agricultural Supplies

Its Agricultural Supplies division manufactures compound animal feed, distributes farm machinery and fuels, and runs a UK network of rural stores, providing a one-stop shop for the farming community.

This side operates over 37 rural outlets across the north of England and Scotland, including seven machinery branches.
It manufactures and distributes some 500,000 tonnes of animal feed produced at three plants in the UK.

The company also services rural and farming communities in the UK with heating oil and fuel from its eight depots.
This division represented £297.5m (71.3%) of revenues, generating a slim but improving profit of £6.7m.

The last year was a successful one with feed volumes, machinery revenues and retail sales all improved.

Engineering

Its Engineering division designs and manufactures pressure vessels, manufactures precision components from specialist steel alloys, manufactures robotic manipulators, and provides engineering design, assembly, and installation services for the nuclear, defence and oil & gas industries.

Engineering contributed £51.3m (12.3%) of sales and £3.9m of operating profit.

Despite lower oil prices and Covid-19 impacting this side in Q1 its adjusted profits were only marginally higher.

However, it ended the period with a 15.9% increase in its recovered order books and now stands at over £44.6m.

Outlook

The company has a strong cashflow and a robust balance sheet, worth some £130m.

Group debt is expected to reduce still further this current year, after the 47.2% drop from £18.9m to just £10m by the year end. Estimates suggest £8m in 2022 then down to just £2m by the end of the 2023 trading year.

Livestock and milk prices remain strong, which should underpin strong demand for Speciality Agriculture in both the UK and the US.

Continued investment in Agricultural Supplies, is expected to be made this year across people, processes and technology.

Market Views

Trading in FY22 has started positively and in line with expectations, with the inflationary headwinds being managed.

The group’s Board remains confident in the prospects for all three divisions.

Market expectations are for a slight increase to £422m in sales, to £17.25m in profits, worth 13.7p in earnings and covering a 5.2p dividend.

For the year to end August 2023 sales are expected at £434m, profits of £17.9m, earnings at 14p and a dividend of 5.4p per share.

My View

I see the next couple of years being a period of advancement for Carr’s. It is a well-run business that is able to grow steadily, aided by the occasional acquisition – much as it has done since 1831.

Having first prepared a Profile on the company way back in July 2019 I have only seen the shares subsequently peak out at 160p, only some 7p better than my initial price.

However, I really do like the investment attractions of this solid company after the hassles of the last couple of years.

With its shares now at only 152p I will set a new Target Price of 185p for 2022.

(Profile 11.07.19 @ 153p set a Target Price of 200p)