When Kevin Bradshaw took over from the long-serving Bob Contreras as chief executive of Northgate at the start of the year, he inherited a company in decline and losing share in a vehicle hire market where success should go to the larger operators that gain the benefits of scale.
A study he commissioned suggested that while van rental was growing by about 6 per cent each year, Northgate’s UK business was falling by about 5 per cent. He instituted wide-ranging changes in the management structure and the sales team was given more flexibility over pricing and was better incentivised. Cost savings of £5 million should benefit the second half, which is why the company is confident enough that profits will be skewed towards that period, more so than has been the case previously.
The full-year figures in June were disappointing. The Spanish business, a source of weakness in the past, was going from strength to strength, benefiting from the country’s growing economic recovery, but there was a decline in the number of vehicles on hire in the UK, the main measure of performance, beginning in the period just after Christmas.
The other change was the relaunch of the company’s fixed-term hire offering, which is better for customers than the alternatives of lease financing and contract hire. The company does not normally update much at the annual meeting, but it indicated yesterday that the decline in the numbers of vehicles on the roads in Britain had begun to be arrested, while Spain was continuing to move forward.
The average period a van is out for hire, another key metric, is ahead in Spain and Britain. A note from Numis Securities suggests that both fleets should be expanding again in the current financial year, by perhaps 1 per cent in the UK and 10 per cent in Spain. Encouragingly, of the 1,600 gains in vehicles on hire since the end of the last financial year in April, three quarters were on those fixed rental terms.
The long-term drivers for Northgate’s core market are still there, companies less keen to see capital tied up in van fleets when they can get good rental contracts and that return to British fleet growth is welcome.
The shares, up 4p at 424p, have come back sharply since the summer and sell on less than ten times’ earnings. That looks a little low.
MY ADVICE Buy
WHY The recovery at Northgate is well under way, but does not appear to be reflected in the share price performance yet
Speedy Hire
One analyst was starting an old hare running yesterday — the prospect of a merger between Speedy Hire and HSS Hire. This was being proposed earlier in the year by one activist investor, but Speedy’s unplanned update, prompted by better-than-expected trading in the first five months of its financial year to the end of August, rather suggests it is doing well enough on its own.
Speedy has had all sorts of problems over the past couple of years and three chief executives. The recovery under Russell Down, the latest boss, would seem about complete. Revenues for the five months are 7.5 per cent ahead of the previous year. Utilisation rates are still improving, up six percentage points to 54.5 year-on-year and ahead of the first quarter.
All this drops through to the bottom line because costs are under control, with another £3 million of overhead savings a year identified, at the cost of a one-off exceptional hit of £4.5 million. Speedy is looking at its entire plant hire range to see which items are the least profitable, while the number of operating divisions and distribution centres has been reduced. As a consequence, profits before tax and exceptionals for the full financial year are likely to be well ahead of last time’s £16.2 million and a bit better than the board’s previous expectations. Peel Hunt, the broker, has increased its forecast from £20.5 million to £22 million. This puts the shares on about 15 times’ earnings. Up ½p at 51¾p, they have not done a lot this year and look set for further progress.
MY ADVICE Buy
WHY The shares have not yet responded to Speedy’s revival
Gulf Marine Services
Gulf Marine Services is an object lesson in why you should look very carefully before buying anything from private equity. Admittedly with hindsight early 2014 was not a good time to buy into the float of a company that makes the bulk of its revenues from oil and gas, providing support vessels serving offshore installations.
The shares were floated at 135p. They were off ½p at 45½p yesterday, having fallen so far that even the axing of the dividend was not enough to force them lower. Revenue at the interim stage pretty well halved. Adjusted gross profits tumbled from $53.1 million to $19.1 million. Cost-saving measures meant that gross margins at 45 per cent were a little bit better than the market had suspected.
An investment programme in new fleet is over and debt, at $378 million uncomfortably close to breaching amended banking covenants, will start to be reduced. The dividend will be reinstated when appropriate (it makes little sense to pay out when debt is at this level). It is in lenders’ interests to be supportive and wait until the oil and gas market recovers. The shares hardly trade on any meaningful multiple and there seems to be no reason to buy. Truly, a flotation to forget.
MY ADVICE Avoid
WHY Absent any recovery in oil and gas, no reason to buy
And finally ...
Eagle Eye Solutions is an interesting tech stock if still a work in progress. It provides software that allows retailers to administer loyalty promotions. Progress is continuing, with fresh cash raised in the summer and new clients such as John Lewis. The company is confident that revenues for the first quarter to the end of this month will be up by a third again with growth from work won earlier. There is still no sign of a profit but losses narrowed slightly last year and there is now sufficient cash to grow further.
