The market gave a warm response to results from Carr’s Group (LSE: CARR) this morning, pushing the shares up 4% to 144p and taking the 10-year gain to 150%.
A major disposal of one of Carr’s divisions this year has strengthened the balance sheet and delivered a substantial capital return to shareholders. It not only bodes well for the future of this £131m mini-conglomerate, but also shows how value can be unlocked at other multi-divisional companies, such as FTSE 100 giant GlaxoSmithKline (LSE: GSK).
Value delivered, prospects good
Carr’s disposed of its flour mills business for £35m gross (£25m net). Today’s results show net cash at the year end of £8m compared with net debt of £27m six months ago. However, since the year end, the company has paid a special dividend of £16m (17.54p a share) and made an acquisition for a net consideration of £6m, so the implied net debt is currently £14m.
Nevertheless, this level of debt is modest and gives Carr’s the opportunity to invest in its remaining agriculture and engineering businesses and to make further complementary acquisitions as and when appropriate.
Stripping out the earnings from the flour mill business, Carr’s delivered adjusted earnings per share of 10.9p for the year (up 7% on the previous year), giving a price-to-earnings ratio (P/E) of 13.6. Meanwhile, a well-covered ordinary dividend of 3.8p gives a handy yield of 2.7% with plenty scope for expansion.
Carr’s performance was robust in what was a challenging year for the agriculture and engineering sectors generally. The recent acquisition will be earnings neutral for the first year, but with organic investment and further acquisitions on the cards, growth prospects look highly promising for the medium term. As such, I believe a P/E of 13.6 represents good value and I rate Carr’s a ‘buy’ on this rating.
Look forward, not back
Compared with the 150% rise in Carr’s shares over the last 10 years, GlaxoSmithKline’s rise of less than 15% over the same period is rather poor. Of course, Glaxo is known as a generous dividend payer, but when you consider Carr’s ordinary dividends and the special payout following the flour mills disposal, the FTSE 100 firm’s total return still lags well behind.
Some of Glaxo’s major shareholders, including the redoubtable Neil Woodford, have been critical of the company’s strategy over the period. There have been calls for Glaxo to unlock value for shareholders in the manner that Carr’s has done with the sale of its flour division.
Woodford reckons Glaxo’s three divisions — pharmaceuticals, vaccines and consumer healthcare — would be valued more highly as standalone businesses by the market than they are combined together as a conglomerate. I think there’s considerable potential for a value-creative demerger of one or more of Glaxo’s divisions at some point. But I also believe that the group as it is now could perform far more strongly in the next 10 years than it has in the last 10.
This is because Glaxo has just been through a tough period of patent expirations, but has now turned the corner, with revenue and earnings set to return to growth this year. At a current price of 1,540p, Glaxo is on a prospective P/E of 15.5 with a 5.2% dividend yield. For a top blue chip, with value that could be unlocked at some point by corporate activity, I believe the shares are very buyable at their current level.
