For Carr's Milling Industries, fertiliser doesn't just help crops grow it also grows profits. In July, the firm pocketed £22.1m after selling its cyclical fertiliser mixing business to Origin Enterprises. In doing so it simplified the group's business and flipped last year's £15.5m of debt into a cash balance of £4.6m in August.
The proceeds will be used to accelerate growth in its three other divisions. A €4m new factory at Markdorf in Germany, for example, will make niche robots that operate in areas of nuclear plants that are too hazardous for humans. The engineering division (18% of profits) is experiencing buoyant demand from France, Germany, Japan, Korea and China. Indeed, the order book closed in October at €38m a 120% rise in the year to October 2011. That's thanks in part to the €6.5m contract made in June for a nuclear decommissioning project in Russia. Overall, the order backlog will keep the firm busy for the next two years. There are also attractive opportunities in the untapped oil and gas sector.
Carr's other two units are more mature, but still solid cash-cows. Together they distribute agricultural products, such as animal feed, fuel and machinery (68% of profits), to farmers, along with milling flour for the food industry (14%). One interesting development was the opening of the new Aminomax plant in upstate New York last month. This facility makes patented rumen bypass protein, which improves milk yields for dairy farmers. It could be major source of future profits.
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Unfortunately, flour milling is suffering from overcapacity, high input costs and the unwillingness of supermarkets to accept price increases. However, there are encouraging signs from Carr's overseas launches of Scotmin and Crystalyx (a new generation of feed supplements).
House broker Investec is forecasting turnover and earnings per share for the year ending August 2012 of £393m and 91p respectively, alongside a 27p dividend (a yield of 3.4%). I value the company on an eight-times earnings before interest, tax and amortisation (EBITA) multiple. Adjusting for the cash and a £6m pension deficit produces an intrinsic worth of 950p a share.
On the downside, investors need to remember that Carr's is small and could get squeezed if there is another recession, and/or the eurozone goes into freefall. That said, Carr's defensive qualities, strong balance sheet and order book should pull it through even during more austere times.
The next trading statement is due on 11 January, and Investec has a target price of 920p.
Rating: SPECULATIVE BUY at 800p (market capitalisation £70m)
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