Carr's Milling Industries

Carr’s is achieving growth through product innovation and sustained investment in infrastructure. While it operates in fairly defensive markets, it has further reduced risk through diversification within each market, supported by a sequence of acquisitions. As a result it has expanded its geographic reach, with almost half of the group’s FY13 profit before tax attributable to international operations. Our sum-of-the-parts analysis indicates that the stock is undervalued at current levels.

Strategy delivers growth whatever the weather
The new management is continuing to pursue the successful strategy that delivered a record £16.1m profit before tax in FY13, growth of 26%. The group benefited from market share gains for its innovative products, most notably its low-moisture feed blocks, AminoMax cattle feed enhancer and the sophisticated remote handling equipment manufactured by its Engineering division. Supportive weather conditions in both the UK and the US boosted demand for animal feeds, feed supplements and fuel oil. Crucially, even without a repeat of the favourable weather conditions, which accounted for £1.9m of the £3.3m FY13 profits growth, further profits growth is expected in FY14. This will be driven by continued market share gains in feed blocks and AminoMax, as new capacity in the US and UK comes on line to satisfy demand, and substantially better operating margins following £17m investment in the new flour mill in Kirkcaldy. The revenue swings primarily reflect the impact of fluctuating wheat prices on feed sales prices.

Scope for substantial growth in global markets
In our opinion, Carr’s stands out from other listed companies in the agricultural supply sector because its innovative feed supplement products address the global trend for farmers to adopt more sophisticated feed regimens. These are required in order to keep up with the growing demand for meat and dairy products driven by a rising global population and increased adoption of westernised diets. This gives scope for substantial growth in both the UK and international agricultural markets, decoupling Carr’s prospects from those of the fairly static UK feed market and reducing exposure to the vagaries of the British climate and EU farming policy.

Valuation: Potential for share price improvement
We adopt a sum-of-the-parts analysis for our valuation, as this approach reflects the diversity of activities in which Carr’s is engaged. This gives fair value at 1,985.3p/share, indicating potential for upwards movement in price towards this.

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