US Edition Northgate
430p+5
Questor says BUY
NORTHGATE, the small-cap van hire group, has returned to growth after five painful years of restructuring. The shares have had a strong run this year, but if the recovery in the UK holds, there could be more gains to come.
Hiring vans is a business that is highly sensitive to economic cycles. The idea is that the vans are purchased with a loan from the bank, rented out for a rate above the interest rate on the bank loan and van maintenance costs, then sold after about two years into a second-hand market with rising or stable prices.
When small businesses are experiencing increasing demand, but can’t afford to buy vans, then the rental business is good and profits rise. However, during a downturn, van hire companies are left with an asset not on hire, and when they try to sell the van into the second hand market prices fall sharply, while the debt pile remains.
Northgate is only too familiar with this experience. The company was staring into the business abyss when its fleet of vehicles peaked at about 131,000 in 2008, with a debt pile of more than £800m, when crisis hit. The van hire group survived, but only after a highly dilutive equity raise and punitive terms from the lenders.
Five years on, and Northgate is finally showing signs of recovery. Underlying pre-tax profits in the first half were up 14pc, to £32m, and the average utilisation of the fleet was 90pc during the first six months.
The company currently generates about half its revenue from hiring vehicles in the UK, and a quarter from hiring vehicles in Spain, the balance of revenue coming from selling vans in those two regions. The fleet of vehicles is split 58pc in the UK, and 42pc in Spain.
There is a recovery taking place in both markets. In the UK the company reported 2,800 more vehicles on hire in the six months ended October, which compares with 1,400 fewer vehicles on hire in the same period last year. In Spain, 1,200 vehicles were on hire in the first half, compared with a reduction of 1,300 in the same period last year.
As the company hires out more vehicles, it is selling fewer of them. The company sold about 11,000 vehicles in the UK and Spain in the first six months, down from 18,000 sold in the same period last year. The prices in the second-hand market were strong, and Northgate also achieved higher prices by selling direct to retail buyers instead of using dealers.
The fleet size and debts are also more manageable. The company has reduced its fleet of vehicles by some 46,000 to about 85,000. Northgate also renegotiated the terms on its debts in April of this year, which has seen the interest rate fall from about 8pc, to about 3pc, reducing interest charges to £6.1m, from £19.5m.
There is no avoiding the fact that being in vehicle hire, with high debt levels, and exposed to the UK and Spanish economies is a risky proposition. However, the core UK market is showing signs of recovery.
The latest strong numbers from the construction industry should also be a boost to white van hires.
Northgate’s shares trade on a price earnings (P/E) ratio of 12.3 times, falling to 11.6 times next year.
Questor thinks the shares represent a good way to play the Santa rally, December being one of the best performing stock market months of the year. Not for the faint-hearted this one, and definitely one to watch closely, but it could just squeeze higher into the end of the year. Buy.
Watch Questor Editor John Ficenec discuss shares to profit from the Santa Claus share rally in December: