Interactive Investor

Stock of the week: Carr's Group leads FTSE All-Share

17th April 2015 16:46

Harriet Mann from interactive investor

Against a difficult market backdrop, Carr's Group's record interims met expectations and its shares have rallied by 20% over the week as a result. The bullish reaction highlights the market's concern over the agriculture results season, so Carr's has diversification to thank for its growth.

Formerly Carr's Milling Industries, the group has changed its name to reflect the broader reach of the company, which operates in agriculture, food and engineering. It's this investment in diversification that drove growth in the period.

Although sales fell 3% to £208.6 million, profit before tax grew by over 5% to £10.6 million, pushing basic earnings per share 9% higher to 8.5p. Adjusted EPS rose 11.5% to 8.7p, when stripping out one-off acquisition costs. Management are clearly confident and have given a 9% boost to its interim dividend to 0.925p per share. Net debt increased to £26 million from £24.6 million, but £6.2 million of free cash flow and £17.9 million of cash and cash equivalents gives some room for potential M&A.

Carr's engineering services seemed the worst hit in the period thanks to global industry challenges and the division was a drag on profits. But this is what bosses were expecting. Although the volume of flour sold was up, weaker commodity prices meant the positive momentum wasn't translated into revenue in the food division.

Its US agriculture business saw "outstanding" growth in market share of feed block products and the UK operations were still positive, despite pressures on farming income. The oil division managed to recover from a slow start to the year, but sales of AminoMax suffered from the pressure on milk prices.

"Our TP has been left unchanged at 180p and this gives a multiple of c.13.0x based on estimated CY 2015 diluted EPS of c. 13.8p. On an EV/EBITDA the ratio at this TP would be 8.7x on the basis of our forecasts which seems perfectly fair," comments Charles Pick, an analyst at broker Numis Securities.

"Although Carr's is facing headwinds at all three divisions and whilst it is in effect a mini-conglomerate with little reason d'etre, there is a good management story and self-help is also a real feature," he adds.

After the successful integration of two acquisitions in the period, Carr's is open to other opportunities if they are the right fit. So far, its second half of the year is going well and the group is confident it will meet expectations. Numis forecasts pre-tax profit of £17.4 million at the end of this financial year and sales of £414.6 million, giving EPS of 13.6p, up 8% on the year.

Prior to the update, Pick reckons the market had been discounting the shares for a profits warning that had not occurred. The shares jumped 9% to 154p after the news, and have continued to climb throughout the week. Friday's highs reached 166p.

This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

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