Founded in Carlisle in 1831 as a baker and flour dealer by one Jonathan Dodgson Carr and listed on the London Stock Exchange since the early 1970s, Carr’s Milling Industries (CRM) is a rarity among quoted companies. One of few remaining conglomerates, the firm focuses on three sectors - agriculture, food and engineering - which appear only loosely connected and boast differing market backdrops and dynamics.
Shares has previously outlined the benefits of the £162 million cap’s broad-based business model, which brings with it geographical and operational diversity and counter-cyclicality (see Plays of the Week, 28 Nov ‘13). Nevertheless, Carr’s remains under the radar of many investors, being engaged in some unfashionably ‘old economy’ activities and with a complicated structure involving joint ventures putting off many small cap investors.
Such thoughts are at the forefront of my mind when I meet chief executive officer (CEO) Tim Davies and finance director Neil Austin. ‘Innovation, technology and research is at the heart of our DNA,’ explains Davies, who has been in the hot seat since March 2013. ‘That is the theme that links these businesses together. We want to be recognised as a truly international business at the forefront of technology and innovation across agriculture, food and engineering.’
Indeed, this international angle is a point of differentiation for Carr’s versus its small band of UK-focused quoted peers and one Davies is keen to stress, stating with some pride that last year, ‘we made 47% of our profit outside of the UK’.
He adds: ‘We were very fortunate in that we came into a well run business that was doing very well and had lots of opportunities. We’ve now developed clear plans for each division’.
Crystal clear strategy
The key strands of Carr’s strategic plan include investing in people, in order to develop internal talent that will shape the business in 10 years’ time, as well as a focus on innovation, because ‘we want a pipeline of new products and ideas coming through’. In addition, Davies is determined to invest heavily in Carr’s myriad assets to ensure long-term competitive advantage - ‘we’ve got 58 sites worldwide and I’ve been to every one of them’.
Davies wishes to grow Carr’s, a cash-generative business blessed with a strong balance sheet, both organically and via acquisitions with potential purchases under evaluation in both agriculture and engineering, though he explains ‘the step change is going to come through acquisitions’.
The sale of Carr’s fertiliser division in 2011 cut exposure to commodity price swings and improved earnings quality. Today, Carr’s three remaining operations focus on investment in research and innovation so they can raise barriers to entry, add value and deliver growth in some commoditised markets.
Carr’s core agriculture division comprises country retail stores, as well as the manufacture and supply of everything from farm machinery to feed blocks which are proven to improve livestock productivity. Davies seems particularly excited about the international prospects for Carr’s branded, molasses-based feed licks. Backed up by university research, these higher margin products help to enrich the diet of all types of farm animals, enhancing the efficiency of animals’ nutritional intake, and are supplied through a vast distributor network across the UK, Europe, Middle East and North America. Brands include the fast-growing Crystalyx as well as AminoMax, the latter a patented rumen bypass protein product ‘aimed at the high-performing dairy farmer’.
‘A farmer invests in our blocks and he works out that by investing a pound he’ll make two pounds,’ explains Davies. He tells me Carr’s is investing in feed block production capacity in the US and has also established a new distribution network in New Zealand. This is a market with a large animal population where demand is growing. Carr’s is also scouting for a possible production facility and the Australian market offers opportunity.
Flouring prospects
The food division produces and supplies flours for use in bread and biscuits to bakeries, food manufacturers and retail multiples from mills at Kirkcaldy in Scotland, Silloth in Cumbria and Maldon in Essex.
One of the most exciting developments for Carr’s, whose customers include Warburtons and United Biscuits, has been its £17 million investment in a port side flour mill at Kirkcaldy. One of the world’s most technologically advanced milling sites, Kirkcaldy kick-started production last September and has consolidated Carr’s position as the leading miller in Scotland, as well as mitigating a key divisional risk as it enables Carr’s to more readily source quality wheat from international markets.
‘The flour market has had over-capacity for the last 15 years and has suffered from low levels of investment in plant and machinery’, Davies reveals. He insists the hefty investment by Carr’s has played a part in shaking up the whole of the UK flour milling industry. ‘The quality of the flour coming out of there is exceptional,’ enthuses Davies. ‘We are getting the operational efficiencies coming through and the commercial benefits from the new mill. We’ve got the logistics capability now and the investment has strengthened our position in the north of England.’
Engineering growth
At first glance, Carr’s engineering division may seem an odd fit and out of kilter with the rest of the group. To a degree that is the point, since it provides a natural hedge to any major agricultural sector issues, is cash-generative and the highest margin part of the group.
From sites in Germany, Carlisle, Swindon and Newcastle, the division designs and makes bespoke equipment for use in the nuclear, oil and gas, petrochemical and pharmaceutical industries, with products ranging from manipulators and robotics to specialist fabrication.
‘It is the jewel in the crown of our engineering division and the hub of our innovation,’ chips in numbers man Austin to a nod of approval from the CEO. He refers to German-based Walischmiller, a manufacturer of remote handling technology, robotics and radiation equipment for nuclear facilities and the oil and gas industry.
Davies and Austin argue Walischmiller is exceptionally well placed to build its global order book due to its ability to manage a whole range of small to large manipulators. Another source of divisional strength is CarrsMSM, the business which has a life of plant contract at nuclear facility Sellafield which Austin insists ‘gives us visibility on orders’.
Nevertheless, given uncertainties surrounding commitments to renewable energy sources and spending in the nuclear sector around the world, I ask Davies for his take on sector prospects. ‘The spend has to happen with decommissioning,’ says the CEO, ‘and the new build if it happens is good news.’
While I see how the agriculture and food arms sit snugly together, I still wonder aloud whether there is value to be unlocked via the sale or perhaps spin-off of the engineering division? Davies fires back without hesitation. ‘It is a really strong engineering business, it is very much core and we are going to keep it. It would be wrong for us and for our shareholders to sell it at this point’.
Carr’s is very much a buyer rather than a seller in the engineering market, with Davies adding that ‘we want deals that give us greater scale and we are going to make sense of our engineering division.’
Mitigating risk
The sale of Carr’s fertiliser division in 2011 cut the group’s exposure to commodity price swings and improved earnings quality at a stroke, yet weather events and the threat of animal disease still represent significant risks.
‘Food safety is a risk’ he says, flagging the damage to corporate reputation that such issues can bring, though the investment in the new state-of-the-art mill helps mitigate this risk to an extent.
Davies also highlights what he calls ‘horizon risk’ - unforeseen events such as animal disease, weather or the milk price which are largely outside of the company’s control. He makes a valid point: ‘Because we are a conglomerate, I think that our first-half result shows the benefits of that diversity. We have that natural offsetting going on across the piece.’
Indeed, Carr’s interim results (14 Apr) did showcase the strengths of its geographical and operational diversity. The company cultivated 2% growth in pre-tax profits to £10.1 million, even though a mild UK winter curtailed domestic fuel, feed and feed block sales. Carr’s overseas operations helped make up for the domestic shortfall as the severe US winter drove record sales of livestock feed blocks across the pond.
Biography
Tim Davies - Chief Executive Officer
Tim Davies, the seasoned agricultural sector player, was appointed CEO in March 2013. On the board of the Agricultural Industries Confederation since 2003, Davies spent the majority of his career with Grainfarmers. As managing director, he led its successful merger with Centaur Grain to become Openfield, the UK’s biggest farmer-owned grain marketing business with £765 million annual sales and a 22% market share.
Carr’s Milling Industries
(CRM) £18.85
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SUMMARY
Growth and income-hungry investors should flock to Carr’s whose investment in research and innovation should help to raise barriers to entry, add value and deliver growth in some commoditised markets.
Bull case
• Strong management team
• Broad-based geographical and operational diversity
• Strong cash generation and progressive dividend
Bear case
• Sensitivity to weather
• Complex corporate structure
• Shares already re-rated
Market value: £162 million
Prospective PE Aug 2014: 14.7
Prospective dividend yield: 1.9%