The sheer diversity of Carr’s Milling Industries means it is more than capable of riding out economic uncertainties.

The sheer diversity of Carr’s Milling Industries means it is more than capable of riding out economic uncertainties.
 
Carr’s Milling Industries operates in some defensive markets (agriculture and food), where growth prospects are underpinned by a burgeoning global population that needs to be fed. At the same time, via its recently transformed engineering arm, Carr’s is well placed to profit from the need to decommission older UK nuclear power stations and replace them with new ones.

Guided by an experienced management team led by unassuming CEO Chris Holmes, Carr’s has remained resolutely profitable despite a recent backdrop of turbulent raw material prices, which have affected its important feed and fertiliser markets. Only last month, Holmes and finance director Ron Wood dropped in on the City to deliver highly creditable financials for the half-year to the end of February.

On the back of these robust numbers, which signalled that Carr’s is on track for an improved performance for the full year, the shares rose to a 52-week high, at which level they still look very good value and offer a healthy and sustainable dividend yield.

Strategy

Founded way back in 1831 by one Jonathan Dodgson Carr, Carr’s Milling Industries is a broad-based combine, whose sheer diversity leaves it well capable of riding out short-term storms in certain of its markets.

Carr’s operates via four divisions – food, agriculture manufacturing, agriculture trading and engineering – and under Chris Holmes’s leadership has a stated strategy of cultivating good organic growth across these divisions, by fostering long-lasting relationships with customers through the highest levels of service and by staying ahead of the competition through investment in product development.

Businesses facing the defensive food market are Carr’s Flour Hutchisons, a long-established flour milling concern, and Carr’s Flour Greens, which supplies speciality flours to independent bakers, the retail ‘multiples’ and food manufacturers.

In agricultural trading and manufacturing, Carr’s makes and supplies everything from compound animal feeds and blends to fertilisers, seeds and animal health products. Holmes is a big believer that there are ‘opportunities to grow through new products and markets’ and is encouraged ‘by the early sales of our Crystalyx feed blocks to New Zealand’ as well as by ‘the prospects for our Avail range of environmentally friendly fertilisers’.

Also located within the company’s broader agriculture operations is its fuels business, which supplies oil, gas
and diesel for domestic, agricultural and commercial customers in parts of Scotland and across Carlisle and Cumbria, as well as 15 retail outlets across Northern England and Scotland, where Holmes says ‘we sell everything from combine harvesters to Wellington boots’.

On the engineering side, the significant businesses are Bendalls, a maker of steel fabrication products for the petrochemical, oil and gas, nuclear, process and renewable energy sectors, and Swindon-based CarrsMSM, renowned in nuclear industry circles for its remote-handling equipment.

Significantly, in March 2009, the engineering arm’s growth prospects were transformed by the acquisition of southern Germany-based Wälischmiller Engineering for C5.5 million (£4.9 million) in cash.

Bought out of administration, this remote-handling technology, robotics and radiation protection equipment business has proved highly complementary to CarrsMSM (both businesses were suppliers to British Nuclear Group), expanding the customer base in both the UK and Germany and enhancing the earnings of Carr’s engineering division.

Having lately reduced levels of gearing, Carr’s has the balance sheet flexibility to continue pursuing acquisitions that strengthen its four divisions, with the recent takeover of fertiliser wholesaler Ag Chem (UK) being one salient example.

Management

Overseeing strategy and the continued development of the company’s batch of businesses is Holmes, the company’s affable but very ambitious boss. Clearly, he knows the group inside out, having joined Carr’s at the beginning of 1991 and swiftly been appointed to the board a year later, going on to assume the CEO mantle in the autumn of 1994. Before Carr’s, he earned his spurs in the agricultural sector via stints in a number of senior management positions within the agricultural division of J Bibby & Sons.

Should he need it, Holmes is able to call upon the considerable corporate experience of Lord Inglewood, appointed to the non-executive chair in late 2005, having been a non-executive director of the business for a year before that. Inglewood, christian name Richard, a hereditary member of the House of Lords since 1989, was a Conservative member of the European Parliament for ten years – between 1989 and 1994 for Cumbria and North Lancashire, and from 1999 to July 2004 for North West England. Away from his Carr’s duties, he is a key boardroom figure at Cumbria-based CN Group.

Ron Wood, who joined Carr’s in 1987, becoming finance director at the beginning of 1988, can take a good share of the credit for the group’s consistently robust financials and solid dividend track record. Wood, who also acts as company secretary, brings experience gleaned via a previous spell as the main numbers man in the detergents division of Albright & Wilson, as well as a period spent as finance director of Cape Insulation. Wood also finds time to carry out tasks in a non-executive capacity for Cumbria Partnership NHS Foundation Trust.

On the non-executive side of the board, Carr’s has, since 2005, been able to leverage the considerable contacts of Alistair Wannop, a director of the English Food and Farming Partnership, of Rural Regeneration Cumbria and of Cumbria Vision. He has previously been county chairman of the NFU and county milk delegate to NFU headquarters, and chaired the minister of agriculture’s regional advisory panel.

Prospects

Recent robust interims illustrated the advantages of Carr’s balanced spread of businesses, with pre-tax profits held at £5.3 million, ahead of the board’s expectations, amid mixed but overall positive performances across its diverse operations.

Underpinning profit was a stronger performance from the agriculture manufacturing division, where sales actually decreased 15 per cent to £22.7 million, due to lower prices for blended fertiliser ingredients.

However, agriculture manufacturing profits more than doubled to £1.1 million as a result of increased fertiliser sales and a lack of the inventory losses experienced a year earlier, which arose on a sharp reduction in raw material prices.

Over in the tough US agricultural market, margins were maintained at Carr’s plants in South Dakota and Oklahoma, thanks to efficiency improvements. Respectable, albeit lower, profits of £3.2 million (2009: £3.5 million) were generated in agriculture trading, in spite of reduced revenues caused by falling animal feed raw material prices – enabling farmers to substitute straights for compounds – as well as a volume decrease following good grazing conditions in the autumn.

The 15 agriculture retail outlets across Northern England and Scotland reported lower sales too, though margins were stable. Helping to offset declines elsewhere in the division were the feed blocks and fuel businesses, which both upped profits on bumper rural demand amid the harsh UK winter snap.

Over in food, profits were off 37 per cent at £900,000 on sales heading south, as reduced volumes and margin pressure caused by increased competition in the market came into play. Carr’s also had to contend with a drop in the average cost price of its milling wheat from £211 per tonne a year earlier to £176 per tonne.

Relative gloom in food was mitigated by cheer in engineering, where sales rose by £3 million to £6.8 million and profits were up from £300,000 to £400,000, mainly driven by the takeover of Hans Wälischmiller. In the wake of the Wälischmiller deal, Ron Wood is upbeat about engineering growth prospects, based upon global demand for new-build nuclear plants.

‘We now have a presence beyond the UK,’ enthuses Wood, adding that recent order intake has been good, including a C6.5 million order to supply robotic manipulators to a German research centre over two and a half years. ‘Demand has grown, particularly in Japan, where we have won some orders,’ he assures, ‘and we have also clinched a C2 million order in China’.

Since the half-year, Holmes says trading has been good, ‘particularly sales of fertiliser and feed blocks’, with the company’s agriculture operations trading satisfactorily overall. On the back of such positive trends, he expects second-half profits to be ‘appreciably’ higher than those delivered last year, which augurs well for near-term prospects.

Values

Bullish about the business and drawing encouragement from the improvement in fertiliser volumes seen since mid-January, WH Ireland analyst Anne Margaret Crow has upgraded her pre-tax profit estimates for both 2010 and 2011, though revenue projections have been pegged back in a move reflecting lower commodity prices.

The company is expecting significant growth in profits from £7 million to £8.5 million for the full year. Next year, Carr’s should cultivate £9.4 million of profit as its top line returns to growth.