ntg thesis
DESCRIPTION
fleet managerTRANSCRIPT
Northgate PLC (LSE:NTG) is a provider of flexible fleet rental to
the UK and Spanish markets and a successful turnaround following
the difficult 2008/2009 period.
The shares trade for ₤2.6, enterprise value* is ₤772.9m. The
multiples are:
________________________________________________________________________
EV*/EBITDA** EV/FCF EV/EBIT EBIT/EV P/E
x2.65 x5.7 x8.2 12.2% x8.8
________________________________________________________________________
* Net debt amounting to ₤418.5m (₤385.3 excluding operating
leases) and diluted shares as of April 2012 (136.31 million)
have been considered for the calculation of market capitalization
and EV
** EBITDA (EBIT + Depreciation + Amortization), EBIT (operating
profit after exceptional expenses), FCF (operating cash flow,
after vehicle sales and purchases less maintenance capex) are
calculated based on April 2012 results.
THE INVESTMENT THESIS:
1 - Northgate trades below private market value while it offers a
sensible foothold in UK and Spain -- two countries in which some
of the major players enjoy either glorious or (surprisingly)
inglorious market positions (more details later in the document).
As a general trend the industry is undergoing a process of
consolidation with some deals completed in 2011 (Avis/Avis
Europe, Hertz/Donlen, Avis/Apex, Alphabet/ING Fleet, ARI/Fleet
Support) or undergoing (Hertz/Dollar Thrifty).
It appears that there is a gap between the current trading
multiples of Northgate and the multiples paid by CAR for Avis
Europe or proposed to be paid by HTZ for DTG.
- Avis purchased Avis Europe at ~13 times earnings;
- Hertz offered DTG about 15.3 times earnings (2012 estimated
earnings of DTG);
- DTG, CAR & HTZ trade at x13, x14, and x19 P/E (source: Reuters)
A buyer of Northgate would acquire:
- sensible enhancement of the UK and Spanish market positions.
Northgate is (arguably) the largest independent player in UK and
probably in Spain, too (details later in the document);
- a portfolio of more than 4,000 customers, a network of 62
locations in UK, 23 in Spain;
- an EBIT / EV yield of 9.8% (at an acquisition price of
₤4/share);
- a respectable stream of free cash flow FCF/EV yield of 14.1%
(at ₤4/share) and profits with room for improvement if, for
instance, cost of debt is reduced from the current 7.1% achieved
on average by NTG;
- a little extra on the side -- the ’’Van Monster’’ retail sales
network which operates eight locations in UK and five in Spain.
If, those assets are as attractive as I think they are,
especially given:
- the consolidation trend;
- the inglorious market positions of some major players in UK and
Spain;
… then maybe Northgate is worth more than ₤2.6/share and maybe a
multiple of 3.5-4 times EBITDA (£600-£746 million equity value),
meaning ₤4.5 - ₤5.5/share would be closer to fair value and
would provide a premium of 69% - 110% to current market price
Rumor - In October 2012 the Times printed that Avis might be
offering to buy Northgate for ₤4/share (a 54% premium to current
price). That would value the company at ~£545m market cap, or
~13.5 times earnings, or 3.31 times EV/EBITDA (as of April 2012).
2 -- On a stand alone basis equity value shall grow with debt
reduction (scheduled bank repayments of £68m - 16% of total
finance obligations - due as soon as November 2012), or better if
fundamentals improve further:
The current Enterprise Value is about ₤773m of which net debt +
leasing ₤418.5m. During 2008-2012 Northgate produced on average
₤115m of free cash flow and ₤322m of EBITDA:
______________________________________
Million ₤ EBITDA* FCF
2012 291 136
2011 309 95
2010 306 182
2009 363 163
2008 340 (1.2)
_____________________________________
Average 322 115
* EBITDA = EBIT + Depreciation + Amortization + Impairment of
intangible assets (2011,2009).
EXIT @ 29% IRR
Assuming that in three years time:
- Enterprise value of the company remains ₤773m;
- EBITDA is ₤291m;
- FCF is ₤136m annually;
- outstanding shares will be 138.6 (vs 136.3 April 2012);
- and debt is fully paid back;
Then the equity of Northgate would be valued around the rather not expensive
multiples of:
- EBITDA multiple => 773/291 = 2.65 times
- FCF multiple => 773/136 = 5.68 times, FCF yield = 17.1%
- price per share = ₤5.47,
If the entry price per share is ₤2.6 the IRR is close to 29%
(assuming no dividends are paid during the next three years).
EXIT @ 15% IRR
Maintaining the same assumptions as above except enterprise
value which I have assumed now to be ₤552m in three years’ time
then the resulting IRR of 15% is accompanied by:
- equity value (no debt outstanding) = ₤552m;
- price per share = ₤3.88
- EBITDA multiple = 1.9
- FCF multiple = 4.06 (FCF yield of 24.7%)
Not expensive multiples and decent return.
***
The analysis below tries to evaluate the performance of the
business and the risks.
REVIEW OF THE BUSINESS
Following nine years of consecutive growth, Northgate’s fleet
peaked at 131,350 vehicles in 2008 of which UK 68,600 and Spain
62,750. The tide has turned, fostered by a radical drop in
residual values (‘‘used car auction prices fell by ₤1,000/unit in
the second half of 2008’’, source: BCA -- European Used Car Market
Report).
During summer 2009 (fiscal 2010) the company had to defer the
testing of covenants, raised new equity (₤108m) and has agreed
new lending facilities (£880 million, which became effective,
upon the receipt of the equity raising proceeds). During fiscal
2010 the CFO who had joined in 2008 became CEO, a new chairman
was appointed, as well as a new CEO and a new CFO in Spain. This
management team (whose compensation is currently linked to ROCE
and EPS, in 2011 CEO’s compensation was linked to ROCE and net
debt levels) barred a strategy that promoted ‘‘market share
first’’ and promoted a new one which could be summarized by a
‘‘leaner but fitter’’ slogan.
Deleveraging, positive free cash flow generation and the
improvement of the bottom line (and ROCE) have been achieved via:
- the organizational restructuring of the company - by
consolidation of 20 operating companies in UK and two in Spain
accompanied by putting all the services under one brand,
implementation of company wide ERP and centralization of customer
service;
- The fleet size decreased by 30% during 2008-2012 but the rental
revenues decreased only by 13% due to the raising of the average
rental prices and management of the assets that achieved 88-90%
utilization of the vehicles (by selling excess vehicles and
better management of the fleet). By comparison Dollar Thrifty
affirms vehicle utilization of 80-83%;
- obtaining a certain diversification away (mainly Spain) from
customers operating in construction industry by increases in
wholesale and retail distribution, and electrical, plumbing and
equipment maintenance service sectors (in April 2012 the
construction had a weight of 34% of vehicles on hire as compared
to 37% in 2011 and 55% in 2010);
- closing down some locations in both UK and Spain
- reducing the number of personnel to 2,918 from 3,402 in 2009.
The turnaround is illustrated by the numbers below:
_____________________________________________________________________________
Year Vehicles TREV AARPV FCF Net Debt WC EBIT
pcs ₤m ₤/year/veh ₤m ₤m ₤m ₤m
_____________________________________________________________________________
2012 91,300 707 5,710 136 385 51 94
2011 104,700 716 5,566 95 529 62 83
2010 109,800 750 5,374 182 615 62 71
2009 123,300 771 5,320 163 936 185 -118
2008 131,350 775 5,108 -1 894 124 118
2007 120,300 715 5,058 -37 755 126 107
2006 111,000 523 4,535 4 524 63 73
_____________________________________________________________________________
TREV = total revenues, rent revenues + revenues from disposal of used vehicles (for 2006,
2007 the income statement did not include them so I plugged in the amounts corresponding to sales
of vehicles from the cash flow statement)
AARPV = Average annual rent per vehicle. Calculated by dividing rent revenues of the year by
average fleet for the year ((beginning balance + closing balance)/2)
FCF = free cash flow . Operating cash flow (after vehicle sales and purchases) less other
investments.
WC = working capital (current assets less cash - current liabilities less short term debt)
_________________________________________________________________________________________________
These good feats are accompanied by:
o allowance for doubtful receivables still large at (₤20.4)m
versus (₤22.2)m in April 2011 and (₤17.08)m in April 2010. Bad
debt at (₤3.2)m versus (₤4.3)m in April 2011 and (₤10.3)m in
April 2010. Net impairment of receivables at (₤4.9)m versus
(₤5.46)m in April 2011 and (₤12.07)m in April 2010;
o dilutive potential of various performance may go up to 10%
(momentarily 2.3%) of the shares. The CEO is remunerated with
₤375,000 in basic salary + ₤96,000 in pension but can make ₤
1,000,000 (including cash, deferred shares, performance shares
bonuses) if certain performance targets are achieved. Starting
2013 the CFO is remunerated with ₤200,000 in basic salary +
₤56,000 in pension but can make ₤520,000 if certain performance
targets are achieved. Employees can participate in a share
scheme where they receive one share free for one purchased;
o higher administrative expenses ₤60.6m (April 2012) vs. ₤56.8m
(April 2011);
o decrease of rental rates in Spain by 2% during April 2012 --Sep
2012;
o covenants could still turn sour if the business experiences
temporary setbacks:
‘‘- Interest cover at 30 April 2012 was 2.4x (2011 -- 2.1x) with
EBIT headroom, all else being equal, of £17m;
- Minimum tangible net worth - Headroom at 30 April 2012 was
£99m (2011 -- £85m).
- Loan to value at 30 April 2012 was 53% (2011 -- 63%) giving
net debt headroom, all else being equal, of £132m.
- Debt leverage cover at 30 April 2012 was 1.3x (2011 -- 1.7x)
with EBITDA headroom, all else being equal, of £97m.’’ (AR 2012).
The company will pay down ₤68m of debt in Nov 2012 which shall
deliver a bit more headroom for these covenants. The fact they
declared a small dividend (₤0.03/share) in June 2012 must show
some confidence (rather than lack of rationality);
o a reduction in the fleet size which may influence the
bargaining position with car manufacturers;
o the defined contribution pension scheme currently shows a
small surplus but was negative during 2008-2009.
MAIN RISKS
DECLINE IN RENTAL PRICES
In the UK the British Vehicle Rental and Leasing Association
(BVRLA) published a member directory 2013 which contains
information (not very exact but still meaningful) with regard to
the fleet sizes of its members as well as the market segments in
which they operate.
The table below presents the total fleet size for each player
that operates more than 3,000 vehicles, and their manner of
approaching the light commercial vehicles segment (vans up to 3.5
tones). Figure ‘‘1’’ means that they are active in that sub
segment:
R = Rental
L = Leasing
FM = Fleet Management
_________________________________________________________________
_____________________________________
Rank Fleet Size R L FM Company
Owner
_________________________________________________________________
_____________________________________
1 590,000 - - - Motability
A charity
2 296,961 - 1 1 Lex
Lloyds
3 167,886 - 1 1 Arval
BNP Paribas
4 135,720 - 1 - Leaseplan
VW & Friedrich von Metzler
5 112,616 - 1 1 Alphabet
BMW
6 66,645 - 1 1 Ald
Societe Generale
7 60,000 1 1 1 BT
British Telecom, spin off 2002
8 57,973 - 1 - Daimler
Daimler Group
9 55,000 1 1 - Arnold Clark
Sir Arnold Clark
10 55,000 1 - - Enterprise
Enterprise Holdings
_________________________________________________________________
______________________________________
11 52,900 1 1 1 Northgate
LSE: NTG
_________________________________________________________________
______________________________________
12 51,518 - 1 1 Hitachi
Hitachi Group
13 50,000 - 1 1 Ifs.Inchcape
Inchcape Group (LSE: INCH)
14 49,900 - 1 1 GE
GE Capital
15 39,937 1 - - Europcar
Eurazeo (RF.PA or RF FP)
16 34,656 - 1 - Leasedrive
MBO/Lloyds Development Capital
17 20,239 - - - Avis
18 24,427 1 1 - Peugeot
19 24,144 1 - - Hertz
20 16,470 1 - - Thrifty
21 15,000 - 1 1 Fleet Log
22 14,965 1 1 1 Fraikin
23 13,243 - 1 - Carillion
24 10,951 1 - - Burnt-Tree
25 10,866 - - - Ogilvie-Fleet
26 9,762 1 1 - DCH
27 8,915 - 1 1 Grosvenor
28 7,165 1 1 - FHS
29 7,060 - 1 1 Fleethire
30 7,000 - 1 1 Pendragon
31 6,817 1 1 1 Translinc
32 6,409 1 - - Budget
33 6,287 1 - - Clm
34 6,115 - 1 1 Jct
35 6,100 1 - 1 TVR
36 5,500 - 1 1 Tuskerdirect
37 5,000 1 - - Hiregate
38 4,950 1 - - Shb
39 4,936 - 1 1 TCH
40 3,587 - 1 1 FG
41 3,049 1 - - Sixt
_________________________________________________________________
_____________________________________
Total 2,141,955 19 27 20
_________________________________________________________________
_____________________________________
BVRLA 2,500,000
(the full table which shows the players’ presence in: cars, heavy
commercial vehicles and minibuses is available for download as an
Excel file at :
https://www.dropbox.com/s/3hfiz4s0q6ft5i5/Market%20Data.xls)
There are about 500 members of BVRLA operating 2.5 million
vehicles (which I assume to be the total market):
(i) - the top 5 players (+100,000 fleet) control 52% of the
market and are owned by major multinationals (notwithstanding a
telecom company and a charity). None of them seems interested in
the R (rent) segment (where Northgate conducts substantially all
of their business) but in the more secure long term L (leasing)
and FM (fleet management) segments. Should any of them (or a few)
move towards the R segment then a decline in the rental prices
may follow. On the other hand rather than distorting the market
they may look around for acquisitions (or if one distorts the
market by lower prices others may defend through acquisitions)
and Northgate qualifies as a target;
(ii) - the bottom 15 players in the table (fleets between 3,000 -
20,000 vehicles) + 459 others (which operate fleets of less than
3,000 vehicles) control about 22% market share (by fleet size).
This cohort shall pose a lesser threat since if they act towards
lowering rental prices they might be hurt themselves;
(iii) - the middle segment consists of 20 companies which operate
fleets larger than 20,000 vehicles but lower than 100,000.
Northgate, topped by 5 players in this group, ranks 11th in the
total table (notwithstanding the Spanish fleet) (but I am
inclined to think that they actually belong higher - the BVRLA
data on fleet sizes seems a bit outdated / larger than actuals.
Northgate for instance was listed with 75,771 vehicles, although
they only have 52,900). Interestingly GE, Avis and Hertz rank
lower than 14th position. All of the players larger than
Northgate (other than Arthur Clarke which combines car trading
with fleet activities) are owned by multinationals. Unless I am
wrong, as a general rule multinational companies are less
inclined to lower prices to gain market share (but rather grow
through acquisitions). The argument presented above under (ii)
stand for the players in this group which are smaller than
Northgate.
According to Northgate’s annual reports the hire rate increase in
2012 was 4% (added to 4% increase in 2011) but some customers
moved to smaller vehicles so due to the mix influence the average
hire revenue per vehicle increased by only 3% in the UK. In the
Interim Management Statement (Sep 2012) the management reveals
that ‘‘Hire revenue per rented vehicle has remained stable since
the beginning of the financial year’’.
Conclusion UK - All in all the risk of decline in rental
prices stands but it is rather a ‘‘business as usual’’ risk than
something imminent, posing a threat to Northgate specifically.
SPAIN - In June 2011 Fleet Europe (a good quality publication)
provided an overview of the industry throughout Europe from which
I harvested some data to construct the table below:
Table 2 - Fleets Spain (+ UK and Global, FYI)
________________________________________________________
Vehicles Spain UK Global
________________________________________________________
Leaseplan 85,875 134,718 1,293,000
Arval 80,019 84,558 667,000
Ald 57,125 59,710 848,000
Northgate* 38,400 52,900 91,300
ING** 29,613 49,766 240,000
RCI Banque 10,917 13,422 489,000
Peugeot 10,243 9,500 185,000
Alphabet 7,868 43,947 301,000
Athlon 4,700 - 212,300
Citroen 1,828 21,918 178,000
Sixt - 9,500
119,700
GE (Europe only) - - 245,000
Daimler 2,400,000
_________________________________________________________
Total 326,588 479,939 7,269,300
_________________________________________________________
Source: Fleet Europe, June 2011, No 54
* from the Annual Report 2012
** purchased by Alphabet in 2011
Northgate appears to be the 4th largest player in Spain. I am
inclined to take this as a ballpark ranking not a bullet proof
one. Even if the table above misses some smaller players
Northgate seems to command 8.6% of total market by fleet-size.
According to the Spanish Association of Car Renting (www.ae-
renting.es) the vehicle renting market encompassed approximately
445,000 vehicles in Oct. 2012 and its 23 members, represent
around 99% of it.
The arguments and conclusion for UK above shall stand for
Spain, too. But the market is more difficult currently and
Northgate has already experienced a decline of 2% in rental
prices during April 2012 -- Sep 2012 (latest Interim Management
Statement).
WITHSTAND DECLINE IN USED CAR PRICES?
The Arval used car market index printed in no 58, page 14 (June
2012) of Fleet Europe shows that after experiencing a large
decline in second half 2008/first half 2009 the used car prices
rebounded but they are still below pre-cris level. What happens
next? I think that venturing an opinion on the matter is as
simple as stating the future range for S&P 500.
However, owing to the same no 58 of Fleet Europe’s marathon
interview with the CEO’s of (mostly) top European players we can
learn their opinions on the big picture:
Question: ‘‘ How do you see the residual values?
CEOs’ answers:
Ald -- quite uncertain, to be monitored closely, but no crisis
expected;
Arval -- not expected to recover pre-crisis levels;
Alphabet -- seem to have stabilized since 2010;
Athlon -- the past 2 years showed that risk reward needs to be
included in the leasing price;
Daimler -- stable with a trend to increase;
Sixth -- recovering but not to pre-crisis levels;
FGA Capital -- due to commercial policies on new vehicles RV could
be under pressure (he must mean cheap new cars)
Business Lease -- pressure on vehicles that are less fuel
efficient;
KBC Autolease - residual values stabilized.
No 58 of Fleet Europe available here:
http://en.calameo.com/read/00119162289f9102171de
So, except contrarian Daimler (‘‘stable with a trend to
increase’’) people seem cautions (rather than straight
pessimistic). Prediction are difficult since the materiality lays
with supply and demand (market prices).
Back to Northgate the Chairman and the CEO feel more of the same
as above about 2008/2009 (dreadful) but refer to 2010-2012 as
‘‘Strong used vehicle markets in both UK and Spain’’. In the
annual reports they publish the number of vehicles sold (and
purchased) as well as the prices (there are also the lines in the
cash flow statements that state the amounts paid to purchase and
dispose of vehicles) so more raw data is available for the
investors’ analysis).
Price and liquidity of used vehicles depend up to a certain
extend by a number of factors described under ‘‘Liquidity’’
below: obsolescence, age and maintenance of vehicles).
In the annual report the company also states that ‘‘Higher
margin retail and semi retail channels accounted for 19% (2011 --
22%) of disposals. They did not say the precise percentage of
the retail sales handled through the ’’Van Monster’’ retail
sales network (eight locations in UK and five in Spain).
Conclusion - the risk of decline in used vehicle prices
stands but it is rather a ‘‘business as usual’’ risk than
something imminent, posing a threat to Northgate specifically.
However, given the covenants and the fact that last time they had
to raise equity the risk of decline in used vehicle prices is
the most significant for Northgate. Further reducing debt (₤68m
scheduled in November 2012) might bring some release to the
matter.
LIQUIDITY IN USED CAR MARKETS
Liquidity (demand) in the used car markets depends on used
vehicle finance, car manufacturer programs and scrappage schemes
(‘‘introduced in many EU countries to kick start sales of new
cars in badly depressed new car markets’’. Source: European-Used-
Car-Market-Report-2012). The report may provide more valuable
info to investors (http://www.buckingham.ac.uk/wp-
content/uploads/2010/11/pnc-European-Used-Car-Market-Report-
2012.pdf, produced by The University of Buckingham Business
School).
The report includes the below data:
o The UK new car sales were on average:
…… 2.2 million / year during 2000-2007
…… 2.0 million / year during 2008-2010
a decrease of 17%
o The Spanish new car sales were on average:
…… 1.4 million / year during 2000-2007
…… 1.1 million / year during 2008-2010
a decrease of 23%
o The UK used car sales were on average:
…… 7.0 million / year during 2000-2007
…… 6.5 million / year during 2008-2010
a decrease of 6%
o The Spanish used car sales were on average:
…… 1.6 million / year during 2000-2007
…… 1.5 million / year during 2008-2010
a decrease of 2%
The differences between the new / used car markets are obvious
(and interesting) but for the purpose of this analysis the
notable facts are:
- the used car markets are more resilient to recession
- they are quite liquid in UK;
- but less liquid in Spain -- which is still liquid enough though.
During 2008-2012, in lower volume markets than the average,
Northgate has been able to dispose of:
…… 118,000 cars in UK
…… 79,200 cars in Spain
THE OTHER FACTORS AFFECTING PRICES AND LIQUIDITY ARE:
Obsolescence
I think the company does not run a significant obsolescence risk
since it operates a rather diversified portfolio.
Northgate’s vehicle mix consists of medium vans -- 41%, small vans
-- 34%, large commercial vehicles -- 13%, cars -- 8%, Buses, 4x4 and
other specialist vehicles -- 4% and that the fleet composition by
make in 2012 was Ford -37%, Mercedes -- 20%, Volkswagen -- 16%,
Peugeot -- 15%, Vauxhall -- 4%, Other -- 8%.
Fleet age
The table below presents the average fleet age as presented by
the annual reports.
_______________________________________
Year Group UK Spain
_______________________________________
2012 1.79 1.78 1.79
2011 1.94 1.84 2.08
2010 1.97 1.73 2.27
2009 1.82 1.62 2.04
2008 1.45 1.33 1.58
_______________________________________
I think the company does not run a significant fleet-age risk
since on average the vehicles are less than 2 years old (which
compares with 3.75 years average age of fleet and lease vans at
auction in October 2012. According to Leasing Life: ‘‘ The
average used LCV price at auction in the UK hit £4,447 in
October, up 5.2% month-on-month and 3.3% year-on-year, and just
shy of the two-year high of £4,483 reached in January this year,
according to the latest report by British Car Auctions.
Although values were up in all sectors, ex-fleet and lease
values hit a record high of £5,201, up 3.2% month-on-month and
1.7% year-on-year. Retained value against Manufacturer
Recommended Price was up by a point on September to 32.6%.
The October average age of fleet and lease vans at auction was
45.24 months; average mileage was 72,352, and sale against CAP
Clean was 101.52%’’). Source: http://www.vrl-financial-
news.com/asset-finance/leasing-life/issues/ll-2012/ll-230-nov-
2012/fleet-friday-jobs,-money-and.aspx
Maintenance regime
The company claims to have ‘‘improved vehicle maintenance
regime’’.
Also Northgate’s ’’Van Monster’’ retail sales network (eight
locations in UK and five in Spain) might be quite useful for
adding to the liquidity of its fleet.
DOWNSIZING THE FLEET MIGHT AFFECT DISCOUNTS FROM MANUFACTURERS
During 2009 -- 2012 Northgate purchased on average 29,725 vehicles
yearly, about 30% of each years’ fleet. The average purchase
price was ₤10,774/vehicle (Value of vehicle purchases as stated
in the cash flow statement/no of purchased cars).
Considering the mix (by make) of the fleet described above as a
proxy for the purchasing patterns the company buys yearly close
to 5,000 cars from 3 manufacturers (Mercedes, VW, Peugeot, close
to 11,000 cars from one manufacturer and about 3,500 cars from a
few other manufacturers. Northgate is not a ‘‘whale’’ like
Leaseplan, GE, etc but it fares better than +400 (smaller)
companies in UK while it is (probably) the fourth largest fleet
operator in Spain. The fleet focusing on light commercial
vehicles might provide a slightly higher relative weight (than
apparent at the first sight) in manufacturers rankings of buyers
of such vehicles.
As a matter of mapping the average purchase price of
₤10,774/vehicle realized by NTG during the last five years
compares to the following retail prices (from the current
websites of manufacturers):
Ford Transit Connect - from £10,620
Ford Transit Van - from £17,995
Mercedes Vito - from £17,680
Mercedes Sprinter - from £20,620
VW Caddy -- from £12,860
VW Transporter -- from £16,960
VW Crafter -- from £20,800
Conclusion - Unless the fleet size falls dramatically, which
appears not to be the case anymore, Northgate will not be
disrupted by suddenly decreasing discounts but will stay more or
less in the same ‘‘discount brackets’’ and faring better than a
lot many smaller competitors and worse than the majors.
THE RISK OF INCREASED COST OF DEBT
The current average cost of debt is 7.1%. If covenants are
breached additional costs may occur. The company is embarked on a
deleveraging program (next tranche of £68m to be paid back in Nov
2012) which will contribute to mitigate this risk.
RISK OF IRATIONAL MANAGEMENT - This management team acted
rationally during 2009-2012 and has recent memories of difficult
times. Odds seem higher for ration to persist (no extravagant
ideas like empire building for instance are signaled by current
‘‘leaner but fitter’’ behavior). They seem to believe there are
hopes for organic growth in UK given a few announcements like:
- May, June-12, company announces 25% increase in its sales
force and promotion of new Head of National Sales;
- Nov-12, Jon Tobbell joins as the National Sales and Marketing
Director. He apparently achieved 50% revenue increase in his
former role at Hermes UK (part of the European group Hermes
Logistics Group, which is owned by German mail order and
catalogue retail giant Otto Group). He ‘‘hopes to achieve
comparable results for Northgate’’;
- New Supply Chain and Business Development Director, New Area
Sales Manager northeast have been appointed;
- Re-launched products -- Northgate’s product addressed to the
retail market (vans for personal use) was, at 31 Oct-12, on track
to double (to £4.4million) as compared to last year.
A REVIEW OF THE GROWTH OPPORTUNITIES
Rent Revenues -- There is little factual indication yet that
rental revenues will grow unless the UK and Spain’s economies
grow as well. The rental rates have been increased during 2011,
2012. But this year UK remained stable (April - September 2012)
and in Spain rates have been decreased by 2%. Still not an
enticing environment.
The company believes there are hopes for organic growth, has
prepared for it and we shall see.
Disposal Revenues -- The company seems to be doing the right
things (fleet mix, fleet age, maintenance) which is good.
Materiality is with supply and demand so except offering proper
vehicles there is not much else they can do.
Operating profit (EBIT) -- shall improve assuming that:
- the savings in staff costs resulting from the decrease in the
number of personnel will be preserved. That represented an
economy of ₤1.6m (April 2012) vs. April 2011;
- the exceptional administrative expenses such as restructuring
costs 2012 - £7m, 2011 -- £5.6m will disappear. The net impairment
of receivables expensed in COGS was also eating out of EBIT £4.9m
in 2012, and £5.5m in 2011. Should these phenomena loose
significance, as they are expected to, EBIT might grow.
Profit before tax -- interest costs are substantial currently.
Paying back £68m of US loan notes (8.8% interest) in Nov 2012
will lower the interest expense by £5.9m for next year. So PBT
could grow by £19.4m if all the above mentioned expenses
disappear;
Net Profit -- regular taxes will start to be paid, too, in 2013. A
deferred tax asset which amounted to £17.2m in 2009 has already
been consumed to a large extend.
Catalysts:
- acquisition by a major player during 2013;
- faster deleveraging;
- debt refinancing at lower interest rates;
- dividend payments.