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Two into one appears to go nicely for agricultural to engineering company Carr’s Group

Published: 22:45 19 Nov 2018 AEDT

Cow
‘House’ broker Investec Securities has a 220p per share price target on Carr’s Group, which currently trades at 158.75p

One might think that the worlds of agricultural feed blocks and nuclear engineering make very unlikely bedfellows, but Carr’s Group PLC (LON:CARR) seems to prove that the two can sit comfortably together in a business that looks to be growing well.

Carr’s traces its roots back 150 years to a bakery business that diversified into flour milling and animal feed manufacture and, as a result, grew to include an engineering side to service its mills and a transport side to deal with distribution.

READ: Carr’s surges amid dividend hike as full-year profits beat expectations

The bakery business provides a lasting legacy through the Carr’s Water Biscuits name, savoury crackers of note, although the company disposed of that business in 1964 and all of its remaining food operations in 2016, having dropped the Milling part of its name a year earlier.

Since that time, the group, which listed on the London Stock Exchange in 1972, has made a number of key acquisitions to build both sides of its remaining operations into a global business straddling both agriculture and engineering.

The company’s revenues are dominated by the agricultural business, reflecting high volumes in feed and fuel, and it currently gets around 75% of its profits from that side, while engineering contributes about 25%, although both businesses are equally important to the whole.

Two parts to Agricultural business

Carr’s chief executive officer, Tim Davies pointed out that there are two parts to the agricultural division with a big traditional UK business involved in manufacturing feed, providing farm machinery and fuel, as well as owning 43 retail outlets throughout the country.

The other side is the feedblocks business which is the focus for international growth, with the market in the United States especially offering huge prospects.

Davies stressed that the feed blocks the company manufactures are nothing like the cattle ‘licks’ they get taken for, being a technology product especially designed to help livestock digest forage more efficiently thereby maximising the feed levels for a farmer and helping cattle and sheep grow more quickly.

The CEO said: “Grass is always the cheapest form of food on a farm, as you can image, and so the more you can get out of the grass the more effective it is for a farmer.

“If you improve digestion of grass by 20% it is going to be a very cost-effective process, so if a farmer invests a pound in our products he probably gets two or three pounds back.”

Globally Carr’s saw its feed block sales rise by 15% over the past year, with sales volumes per tonnes sold increasing by 17.7% in the US, while in the UK they were up 8.9%.

International expansion

Carr’s made its first acquisition in the US in 1997, with the purchase of Animal Feed Supplement of Oklahoma which started the expansion of its feed block business, and the group now has five factories producing blocks across all the cattle producing regions of the US.

The firm also has operations in Germany and is developing a plant in New Zealand – seen as a major market for feed block, being potentially twice the size of the UK market.

Davies noted that the firm is also looking to move into South America, with new-build operations planned in Uruguay and southern Brazil.

Complementary to the feed block business, back in September, Carr’s expanded its animal health products business with the acquisition of Animax Limited, and related business Clinimax Limited, for a total cash consideration of up to £8.5mln.

READ: Carr's Group expands animal health products business with £8.5mln cash acquisition of Animax

Suffolk-based Animax, which was established in 1982, is at the forefront of innovation in the field of livestock trace element supplements delivered via patent-protected bolus.

Carr’s CEO said the Animax buy is “quite an important strategic acquisition” for the group, allowing it to cross-sell the product with feed blocks and introducing the product into its international markets.

“So,” Davies said, “the whole thread really comes back to what we are trying to do, is to buy high value businesses that can be grown on a global basis.”

Nuclear visions

Turning to the engineering business, Carr’s group finance director Neil Austin takes up the cudgels to explain where this diversification has come from.

Similarly to the agricultural business expansion, the engineering push started in the mid-1990’s with the acquisition of Bendalls, a specialist fabrication business based in Carlisle operating in the nuclear, oil, gas and petrochemical industries.

The Cumbrian town’s position close to the then main UK nuclear plant at Sellafield drove an increase in the business for pressure vessels and robotic arms and led to expansion, notably into Germany in 2009 with the acquisition of Hans Wälischmiller GmbH.

Last year, that expansion took the engineering business into the US with the purchase of NuVision Engineering, a technology and applications engineering company focused on providing value in commercial nuclear and power plant facilities, government waste remediation facilities and waste clean-up.

Austin pointed out that the NuVision purchase has bought “a real collection of tech knowledge, patents and intellectual property” into the engineering division that can now be applied globally.

Like the feed blocks side, growing the business globally has been the main ambition, with the US acquisition providing a cross-selling outlet for the group’s German business focused on robotic handling, while the engineering side is also making big sales into China.

The group sees significant opportunities in the US nuclear market, but has strong order books across most of the engineering division.

Austin noted that: “When the nuclear side is not busy, then the oil & gas side tends to compensate for any drop-off in demand.”

Strong rebound in 2016/17

So, two into one looks to be working well for Carr’s with the firm recently delivering a strong set of 2016/17 results to resume an impressive growth curve following the previous year’s wobble.

Carr’s reported pre-tax profits of £16.6mln for the full-year to 30 September 2017, up 45.2% on the previous year, while revenues climbed 16.5% to £403.2mln.

The jump in earnings was attributed to a strong performance in the group’s agricultural segment, with US feed block sales “significantly ahead of expectations” with an increase of 17.7% as US cattle prices recovered.

Carr’s also reported a strong performance in its UK agriculture arm, with growth across all areas, and revenues up 14% at £359.6mln, reflecting improved farm incomes.

In its engineering segment, the group’s revenues climbed 43.6% to £43.6mln, with adjusted operating profit surging 534% to £4.1mln following a major US contract delay the previous year and a fall in cattle prices.

The group saw an impressive 15% jump in its share price on results day, and although it settled back a bit afterwards the stock is still up by around 25% in the year-to-date at 158.75p.

Broker targets 206p per share

‘House’ broker Investec Securities has a 206p per share price target on Carr’s Group, and is forecasting adjusted pre-tax profit to rise to £17.4mln in the current financial year.

Carr’s CEO Davies said the group highlighted last year’s performance ”as a bump in the road” and this year’s performance has proved that to be the case.

Davies concluded that “it is pretty clear what is the group’s ambition, which is to be recognised as a truly international business at the forefront of technology and innovation across agriculture and engineering.”

He pointed out that the group is very focused on growing both businesses, seeing “real value in the engineering business if we get it right” which they want to make sure happens so the group gets value for its shareholders.

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