Should Northgate heed the call of its activist shareholder and disassemble White Van Man? The vehicle rental business beloved of the small-jobs trader and operator of small commercial fleets is facing a call from one of its biggest investors, Crystal Amber, to break itself up by offloading its booming Spanish arm.
Richard Bernstein at Crystal Amber, fourth-largest shareholder with a holding of 6.3 per cent, reckons the Spanish division, which controls close to half the country’s market for renting small commercial vehicles, is worth €700 million.
If true, this valuation, which is based on the likely worth of a local rival, Alquiber, listing shortly in Madrid, would mean the Spanish business is worth more than Northgate’s stock market value in the UK at, give or take, £535 million.
Mr Bernstein also says that he has established that Northgate turned down a written offer proposal of €400 million for the Spanish business from Apollo, the US private equity group, some four years ago. Sources close to Northgate said they were not aware of any proposal.
With a line-up of bidders said to include rivals Avis Europe, Europcar and Sixt as well as private equity, his argument is straightforward: take the money, invest it in the UK business and buy back shares in order to improve the lacklustre price.
Mr Bernstein’s record is good: he bought into Ocado, the grocery delivery business, before its elevation to the FTSE 100, and he took stakes in Pinewood Studios, Thorntons chocolates and Aer Lingus before all three were bought by suitors. His logic seems compelling. The question is: is he right?
Northgate has been operating since 1981. It consists of three main businesses, in the UK, Spain and Ireland, employs just under 3,000 staff and makes annual revenues from renting vehicles, which it also sells on, of about £470 million.
While its Spanish arm is firing on all cylinders, it has been struggling in the UK. The critics would say that Northgate has failed to capitalise on its market opportunity, as company owners increasingly prefer to lease their vehicles rather than buy them.
So what of Northgate’s arguments? It is by its own admission in recovery mode. Under Kevin Bradshaw, the former boss of Wyevale Garden Centres, who has been chief executive since January last year, the group has been much sharper on its prices and lease terms, thereby competing more effectively. He has overhauled the team around him, not least in Frank Hayes, who is in charge of the UK arm.
Mr Bradshaw has also extended the time that Northgate holds on to vans before selling them from about 40 months to between 43 and 49 months. This means it gets value out of renting them out for longer that is not lost when it opts for a sale.
Its argument for retaining Spain, though not yet formally stated, would be straightforward. If it was worth €400 million four years ago and €700 million now, what’s to stop its value increasing still further: to $1 billion or more at some point, say?
The problem is that Northgate’s recovery is taking an awfully long time, with precious little value being created for shareholders. The longer holding time for its vehicles is also having a knock-on effect: this week Northgate reported a 27 per cent fall in pre-tax profits to £52.7 million for the year to the end of April. Profits are not expected to resume any steady growth upwards until the 2020 financial year at the earliest.
So what to do? If you’re a holder, there seems little point in selling. The shares, up 1¾p at 399½p yesterday, are well below their peak of 656p in 2015. With the price low, it would make more sense to own Northgate over the longer term.
ADVICE Buy
WHY The price should come back as management delivers, or through a concerted shareholder campaign
Stagecoach
Board meetings at Stagecoach cannot be entirely comfortable affairs at the moment. Sir Brian Souter, the co-founder, told investors last August he was concerned as the share price was “in the doldrums”.
It had slumped from close to 400p in the summer of 2015 to nearer 170p at that point. Subsequent months have not been kinder. The stock was changing hands at around 124p during parts of trading yesterday.
Sir Brian and his sister Ann Gloag, a non-executive director and the other co-founder, still own about 25 per cent of the company.
They both know Martin Griffith, the chief executive, well as he was finance director when Sir Brian was in charge. The conversation when Mr Griffiths explained to the board the need to slash the annual dividend by 35 per cent to 7.7p would have been interesting to hear.
It could be some time before Stagecoach escapes its problems. The east coast mainline franchise, which the government stripped from the company, can take a share of the blame with Stagecoach booking an £85.6 million loss from that disaster.
The company now plans to base its dividend solely on the performance of its bus division. That could be a prudent move as its remaining rail franchises, the west coast Virgin Trains venture and East Midlands Trains, are due for renewal in 2020.
While Stagecoach intends to tender for both, and is also bidding for the Southeastern franchise, there is no guarantee it will have a presence in rail into the next decade.
Annual results showed revenue down 18 per cent to £3.2 billion and pre-tax profit dropping to £144.8 million, compared with £151 million.
Analysts from Liberum called the decision to rebase the dividend sensible but warned that the challenging outlook for the UK bus sector could make it more difficult to grow shareholder payouts.
Gert Zonneveld, transport analyst at Canaccord Genuity, has a “buy” rating on the shares. He acknowledges the “considerable challenges” facing the business but believes “over the medium term there should be attractive opportunities to further grow its public transport operations”.
ADVICE Sell
WHY Uncertainty over its other rail franchises and a lowered dividend
