Van hire group Northgate (LSE: NTG) has attracted attention from activist fund Crystal Amber over the last year. Fund boss Richard Bernstein told The Sunday Telegraph he thinks the company is “wide open to a bid”.
Today’s news could hasten or delay that process, depending on your point of view. Northgate shares fell by 11% this morning, after the firm said its underlying pre-tax profit fell by 10% to £75m last year. The main problem was a slump in UK demand — a total of 39,500 vehicles were on hire in the UK at the end of April, down from 42,400 at the same point last year.
This weakness hasn’t prevented the board recommending an 8% hike to the full-year dividend, which rises to 17.3p per share. But it does raise questions about the group’s outlook against a backdrop of slow economic growth.
Here’s the plan
The first bit of good news is that Spain’s economic recovery is driving extra demand for vans. Vehicles on hire in Spain rose to 37,700 at the end of April, up from 35,700 at the same point last year.
The second piece of good news is that Northgate has an ambitious new boss, with clear plans for the firm’s growth. CEO Kevin Bradshaw’s last job was as UK managing director of car hire group Avis Europe. So he’s no stranger to the rental industry and should have a good understanding of market conditions in both the UK and in Spain.
Mr Bradshaw says that the company is lumbered with outdated IT systems and inefficient sales and marketing. Addressing these weaknesses should defend Northgate’s 31% share of the flexible rental market and enable it to expand more aggressively into the fast-growing contract hire market.
Today’s fall leaves the stock trading on a P/E of 10, with a dividend yield of 3.6%. I’m tempted and have added the stock to my watchlist for further research.
High street health test
Investors expecting carpet retailer Carpetright (LSE: CPR) to bomb after its results were given a surprise this morning. At the time of writing, the group’s shares are up by 11% at 200p, despite underlying pre-tax profit falling by 21% to £14.4m last year.
This surprise gain may be because today’s figures suggest that Carpetright’s efforts to revamp and update its stores are paying off. UK like-for-like sales (LFL) rose by 1.8% during the second half of the year. Management says the average LFL increase in refurbished stores was 6.8%.
Performance in Europe was encouraging too. This region accounts for less than 20% of sales, but contributed £5.7m — or 35% — of last year’s underlying operating profit of £16.4m.
The main risk I can see is that Carpetright’s profit margins appear to be under pressure. Revenue was broadly flat at £457.6m last year, but the group’s gross profit margin fell from 60% to 58.8%. Operating margin, which includes overheads such as staff costs, fell from 4.4% to 3.6%.
Investors will need to hope that the sales boost provided by revamped stores translates into stronger profits this year. With the shares trading on 11 times 2018 forecast earnings with no dividend, I’d argue the stock is priced about right for now.
