Redde Northgate plc (LON:REDD) has come through the COVID crisis in very good shape so far. We expect minimal impact on the former Northgate business from “lockdown 2.0”, a strong recovery in profits and a re-rating as normality returns and Redde reverts to mean. We could see further useful earnings upside from acquisitions such as Nationwide and revenue synergies not yet included. The Group is transforming itself into a mobility business which is higher returning, more diversified and has sustainable compounding growth prospects.
- The Redde and Nationwide deals highlight that the group has attractive opportunities to expand its product and service offerings beyond asset rental. This strategy should generate strong returns and reduced earnings volatility which will be welcomed by investors. The ESG positioning is also underway with detailed plans and targets expected in the next reporting period.
- Robust H1 performance: Underlying PBT was £40.6m, up 47.2% year-on-year and usefully better than we expected. Rental profit was down in UK&I (-3.4%) and Spain (-18.9%) but this was offset by sharply higher disposal profit and a maiden contribution, albeit modest, from Redde. The results reflected the impact of COVID-19 lockdowns on rental, lower traffic volumes (Redde) and initial losses from Nationwide. Trading improved progressively through H1 and LCV rental volumes are now ahead year-on-year.
- Recovery in FY2022. We expect a strong recovery which should continue into FY2023. We expect adjusted EPS to be close to FY2018 levels in FY2022 and grow by another 27% the following year.
- Comfortable finances with contract hire options. The group has considerable headroom in its bank facilities and is very comfortable against its covenants. It could also make significant changes in its financial profile by switching from ownership to contract hire financing of its rental fleet. We estimate that each five-percentage point switch would reduce the group’s capital employed by £27.5m and make earnings less volatile.
- Valuation: We calculate a fair value of 447p per share for Redde Northgate, upside of 70%, using an average of our DCF, Dividend Discount and price/book calculations. On an earnings basis, this would be a P/E of 10.6x based on our FY2023 projection compared with 6.1x at present. The share price traded at these levels two years ago and we expect it to return there as earnings recovery feeds through. If ROE can be restored to the levels of FY14-17 (averaging 13.3%) we see upside to almost 700p.