Interactive Investor

Stockwatch: is lockdown good news for this firm?

Confidence in the company is resilient to the latest Covid-19 restrictions.

5th January 2021 14:11

Edmond Jackson from interactive investor

Confidence in the company is resilient to the latest Covid-19 restrictions and could create a buying opportunity.

Confidence in Redde Northgate (LSE:REDD) – a £640 million commercial vehicle hirer and servicer – remains resilient to the latest lockdown rules.

Its stock eased 3% to 258p, relative to last March’s shock plunge from 285p as low as 112p and a “vaccine re-rating” last November from 280p and which hit 270p.  

Fundamentally still cheap, but with reasons 

If forecasts are dependable then the stock’s prospective price to earnings (PE) ratio is 9.5x, falling to 7.5x in 2022. This assumes net profit of £67 million rising over £86 million, a basis for a 13.7p dividend rising to 17.3p. This would yield 5.3% rising to 6.7% based on current market price. 

The stock remains high in chart context given the market’s confidence in vaccines must mean Covid-19 is progressively defeated – despite a rather desperate month or two lying ahead.  

Yet the rating remains modest – according to forecasts – because investors likely want more proof of the merger a year ago between light commercial vehicle hirer Northgate and Redde, a provider of accident management and related services.  

Both companies appeared to be struggling. Northgate had met with reduced UK demand and competitive pressures in Spain. Redde had working capital issues and higher debt, as well as a large insurer not renewing a hire-and-repair contract.  

To a conservative financial mind, pursuing a merger then piles on risk. Moreover, Covid-19 has since compromised demand. More hopeful investors bought into the rationale of greater scale and cross-selling. In fairness, the interim results cited opportunities such as a new accident and incident management product, as well as a total £15.9 million in run rate savings.   

‘A leading integrated mobility solutions platform’ 

Whatever that means! Such is the financial PR image for a group that offers “services spanning the vehicle life cycle across supply, service, maintenance, repair, recovery, accident management and disposal through sale or salvage”. It has a fleet of more than 110,000 owned and 500,000 managed vehicles across the UK, Ireland and Spain.  

Strategically, this looks attuned to the more delivery-oriented society Covid-19 may well leave in its wake. Also, there is a trend towards more vehicle hiring rather than ownership, to reduce businesses’ capital employed.  

Redde Northgate therefore has elements of an essential services stock, and its strong profile of cash generation should mean sound dividend capabilities once the pandemic lifts and debt is paid down. 

The group is capitalised at £655 million relative to the 2022 year's projected revenue of £1.3 billion, however including debt the “enterprise value” is £1.2 billion. Even though debt is reducing, at £489 million last October it also weighs on the rating and generated an £8 million interim net interest charge. 

Somewhat ironically, the interim dividend was cut 

Not quite a month ago the board said it was confident in its strategy and of meeting market expectations despite the economic uncertainties and the risk of future more severe lockdowns. On the face of it, that would encompass the current lockdown, although Michael Gove has this morning pushed the boat out to March versus the prime minister talking of mid-February. 

I would caution that the Redde Northgate board could not have taken into account the more highly transmissible Covid-19 variants that have manifested since it affirmed expectations. 

In any case the board did not back its claims by way of payout. While interim normalised earnings per share (EPS) of 13.4p compared favourably with 27.3p consensus for the full year, in context of expectations for a 13.7p total dividend the interim was cut from 6.3p to 3.4p. 

This was explained as being “in line with dividend policy at the time of the merger, to pay an interim dividend that is half the prior final dividend”. But it countered the interim results’ headline of “encouraging momentum” when this 3.4p a share payout will cost under £8.4 million.

The context is £58.6 million first-half cash inflow versus a like-for-like £12.8 million outflow. The interim statement also drew attention to “steady state cash generation of £80.4 million, up from £59.2 million”.  

A charitable explanation is the board will bridge the gap to a 13.7p dividend at the full-year results (possibly in June). But I am not assuming this, given the interim statement also cited: “Covid-19 has meant significantly reduced business activity across all areas of the group, reducing activity. There has been a reduction in vehicles hired out, temporary closure of vehicle sales operations and a lower volume of accidents handled through the insurance side of the group.” 

That would appear a very prudent reason why, given the risk of further more severe lockdowns, a board would cut the interim payout. 

Much rests on how the customer base is affected 

If it is set to carry on pretty much as usual despite the government’s now ‘stay at home’ requirement, Redde Northgate’s business should not be hurt. The interims’ story was the Northgate side performing ahead of expectations, benefiting from strong used vehicle prices, with Redde more affected by lockdowns. 

Overall, I feel disinclined to assume market forecasts, but if a shareholder, I would not panic. Redde Northgate looks well-positioned eventually to capitalise on more delivery activity and a shift in commercial vehicle ownership towards rental.  

From a fresh-money perspective, however, the stock appears a good example of those that enjoyed a good run from end-March 2020 – and especially on hope for vaccines during November. But where there could be a reality check ahead. I see a possible risk of a warning at end-March.

Possibly the crux is whether the (extent of) dividend forecast is included in the board’s 8 December reference to “meeting expectations” for the 2021 financial year. But, given the market’s generally hopeful outlook, 13.7p is probably assumed.   

Fairly strong, but indebted, balance sheet 

At end-October 2020, goodwill/intangibles represented 34% of £882 million net assets and there was £909 million property and vehicles for hire. That seems reasonable asset backing. 

Against £63 million cash, there was £489 million debt, chiefly long term, also £104 million lease liabilities. I am not too worried by those, given the government and Bank of England will continue stimulus measures and low rates. Meanwhile, Redde Northgate’s interim cash flow statement showed £80 million net cash generated from operations, with just £4 million applied for investment, allowing £74 million repayment of bank debt. Debt should also trend lower helped by leasing vehicles from manufacturers instead of buying. 

Redde Northgate: financial summary 
year end 30 April

 201520162017201820192020
Turnover (£ million)614618667702745779
Operating margin (%)15.614.612.39.110.13.6
Operating profit (£m)95.890.681.864.17628.4
Net profit (£m)66.861.560.943.251.47.7
EPS - reported (p)49.245.545.132.037.84.9
EPS - normalised (p)49.246.345.833.438.035.2
Price/earnings ratio (x)     7.6
Return on equity (%) 13.712.38.29.31.1
Operating cashflow/share (p)6.354.535.4-60.528.421.7
Capital expenditure/share (p)4.84.64.59.911.87.6
Free cashflow/share (p)1.549.930.970.416.514.1
Cash (£m)9.755.241.221.435.767.8
Net debt (£m)338310310439437576
Net assets (£m)426471517539564872
Net assets per share (p)320354388405423354

Source: historic Company REFS and company accounts

Net positive upshot but ‘mind the gap’ 

I put a marker down on Redde Northgate as a business potentially well suited for the post-pandemic era – offering superior and dependable yield. Questions are mostly around timing and the extent the market wants to (continue to) price in recovery-to-growth potential.  

But I am less convinced the group is sufficiently immune to this tougher lockdown regime – and its potential to drag on – also if market sentiment tilts to profit-taking as Covid-19 statistics soar in the UK and US. As a potential ‘buy’ I would wait to see how this lockdown evolves, especially any pre-close update from Redde Northgate. ‘Hold’. 

Edmond Jackson is a freelance contributor and not a direct employee of interactive investor.

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