Investors’ Chronicle: Carr’s, Nvidia, Kier

HOLD: Carr’s Group (CARR)

With profits stable for the first half of the 2021 financial year, the agriculture and engineering company’s new chief executive is talking about simplifying the rabbit warren of corporate structures, writes Alex Hamer

Carr’s has all the lingo of a 21st century business, with talk of synergies and governance reforms, but is still built around an oldfangled combination of farming products and engineering, spread across 20 different businesses. The portfolio has delivered stable profits and dividends, even during the pandemic. The group’s share price also made sizeable gains on the back of solid half-year numbers. 

Carr’s both sold a record 165 tractors in the six months to 27 February and also found new work in the defence sector through its engineering division. The engineering division — the company’s smallest — took a hit from the oil price crash but the agricultural units made up for this. Carr’s said the engineering order book had also recovered somewhat, standing at £44m compared with £37m at the end of its last financial year, in August. 

The question for new Carr’s chief executive Hugh Pelham is whether the existing structure of the group provides the optimal route to new business opportunities. To this end, he has promised both a simplification of the company and new acquisitions. He told Investors’ Chronicle that both were possible. Carr’s is looking at buying other businesses in continental Europe, he said, which would add to existing engineering and speciality agriculture businesses in Germany. 

“While we continue to have autonomous business with their managing directors, if they produce similar products and serve similar customers, albeit in different geographic markets, I am keen we get them operating more closely,” he said. 

Pelham gave the example of Carr’s paying different prices for molasses in Germany, the UK and the US, with significant differences between the countries. 

The farming divisions were the profit drivers in the first half. Speciality agriculture, which sells feedblocks and other livestock products, saw a one-quarter hike in its adjusted operating profit to £8m, while engineering contributed an adjusted operating profit of £0.9m, a fall of almost a quarter on last year. The group trades across the UK, the EU and US. Pelham said Brexit had made imports and exports more difficult from the UK.

The company cut its net debt, excluding leases, to £10.6m as of 27 February. This was partly down to a working capital inflow of £4m. 

Broker Investec has forecast a minor increase in cash profits for the full year, at £21.8m compared with £21m in 2020. Carr’s is a bizarre company in many ways, with its wide range of businesses more akin to a conglomerate like Tata than a firm with annual sales of around £400m. Still, it has been a consistent performer despite wider economic disruption.

BUY: Nvidia (US: NVDA)

Nvidia struck a deal to purchase chip designer Arm Holdings from SoftBank back in September but it must overcome regulatory hurdles across multiple jurisdictions for the takeover to complete, writes Nilushi Karunaratne

The UK government has ordered an investigation into Nvidia’s proposed $40bn (£29bn) takeover of chip designer Arm, citing concerns that it could undermine national security.

Culture secretary Oliver Dowden has issued a “public interest intervention notice” and instructed the Competition and Markets Authority to take a closer look at the implications of the deal. The CMA will commence a ‘phase 1’ investigation and has until midnight on 30 July to report its findings.

The CMA announced in January that it was looking at the tie-up’s impact on market competition and whether it would create an incentive for Arm to “withdraw, raise prices or reduce the quality of its intellectual property licensing services to Nvidia’s rivals”. But it had yet to launch a phase 1 probe.

“We want to support our thriving UK tech industry and welcome foreign investment,” says Dowden. “[B]ut it is appropriate that we properly consider the national security implications of a transaction like this.” Indeed, Arm’s technology is used in critical infrastructure across the UK, as well as in defence applications.

Dowden has the power to clear the Arm takeover, approve it subject to certain undertakings, or ask the CMA to launch a more in-depth ‘phase 2’ investigation. Nvidia had envisaged that the acquisition would be completed in early 2022, and the news of a UK inquiry sent its shares down a little over 3 per cent to $614. Still, amid strong global semiconductor demand, the shares are up almost a fifth so far this year.

Since Arm was taken private by Japanese conglomerate SoftBank in 2016, the importance of semiconductors has become more apparent amid the strains of the US-China trade war and the recent global chip shortage.

There is now an increased focus on technological sovereignty, as countries look to become more self-sufficient in addressing their chip needs. As part of his infrastructure plan, President Biden is proposing investing $50bn in the US semiconductor industry.

Arm is a particularly important player in the semiconductor industry as its chip designs are used by 70 per cent of the world’s population, in everything from smartphones to cars.

There are fears that Nvidia could get an unfair advantage by limiting competitors’ access to technology, or raising the cost of access.

The deal also faces scrutiny from regulators in the US, China and the European Union. Beijing is no doubt nervous about a merger that would hand a lot of power to a US company at a time when Chinese access to American semiconductor technology is being restricted.

If the deal is blocked, in the absence of another buyer, SoftBank could publicly list Arm as it had previously intended to do. This could provide an attractive option amid the current semiconductor upcycle.

Nvidia also revealed last week that it is pushing into central processing units (CPUs) for data centres with its Grace CPU, which will be available from 2023 and will be able to handle the large volumes of data required for natural language processing and AI supercomputing.

So, even with the Arm deal in flux, brokers remain bullish on Nvidia’s prospects, with 31 out of 38 analysts having a ‘buy’ recommendation on the group, according to FactSet. With or without Arm, Nvidia will remain a leader in the semiconductor industry, benefiting from long-term structural tailwinds.

SELL: Kier (KIE)

Placing and open offer planned in the coming weeks as construction specialist’s net debt rises by almost half over the 12 months to the end of December, writes Emma Powell

Kier has ramped up efforts to bolster its balance sheet, announcing plans for an equity raise of between £190m and £240m via a placing and open offer in the coming weeks. 

The group is grappling with a rising debt burden, which on a net basis (ex lease liabilities) jumped by almost half over the 12-month period to £354m. Last week it announced the sale of housebuilding business Kier Living for £110m, subject to shareholder approval, which will contribute towards reducing leverage. 

Management has unveiled a set of medium-term targets, aiming for revenue of £4bn-£4.5bn and an adjusted profit margin of around 3.5 per cent. To achieve these goals, management is hoping to capitalise on government rhetoric around boosting infrastructure spending, as well as utilities projects such as the rollout of 5G.

“The key is getting the discipline into the contracts you take,” said chief executive Andrew Davies. That has previously not been a strength for the group. Yet, having sold the facilities management and environmental services businesses and exiting lossmaking contracts, additional measures have been put in place to assess risk at each stage of the projects it takes on. 

Investors will be hoping this fundraising goes better than the calamitous 2018 rights issue, which was taken up by just over a third of shareholders, with underwriters taking up the slack. Progress in simplifying the group’s operations and cutting problem contracts may prompt investors to look more favourably on Kier. 

Consensus forecasts are for an improvement in earnings to 14p a share this year, which leaves the shares trading at seven times forward earnings. Given the competitive challenges associated with achieving those revenue targets and ultra-thin margins associated with the sector, that valuation does not seem compelling.

Chris Dillow is an economics commentator for Investors’ Chronicle