The point around resale prices sounds very plausible.
The good thing is that they are getting to grips with the business.
Plainly the UK is slowing down - which could be a read-through for other companies but I have confidence that the current management we shape the business accordingly.
We have good momentum in Spain so that should balance matters out and we have the dividend being maintained/progressed.
A good value stock and will be re-investing my divis when they come along.
The bounce on Thursday makes me think that the weak holders have got out.
Has been a rough ride the last 6 months, though.
Yes that makes sense. My previous example doesn't really work as if the depreciation was correct there would be 0 profit/loss on sale.
In any case, logically, the new longer holding period should improve things so the 25% fall in profit expected must be due to less profitable business and the longer holding period may be just postponing losses on sales due to under depreciation until next year.
My take is the value of 3 year old vans has collapsed and rather than dump them on an unwilling market it makes more sense to keep them an extra year and sell them for less but at less of a loss against their depreciated value or possibly even a profit.
Using vans of an older average age will also allow them to discount their prices to compete more effectively. Everyone's a winner apart from customers who don't negotiate a better price for a slightly older vehicle.
The advantage of taking this approach is the avoidance of a massive provision for the revaluation of the fixed assets based on current values for 3 year old vans. I think takeover approaches can now be expected. A venture capitalist could sell the Spanish business for the current market cap and run down the UK business for cash until conditions improve at which point they sell it to a van manufacturer.
I am a little confused. These are my thoughts at simple level.
The suggestion seems to be it is better to keep vehicles for a longer time.
Therefore there will be a longer period of depreciation before disposal.
Logically, during this additional time the contribution from the vehicle (rental income less variable costs) must be greater than the depreciation, otherwise it would be better to continue to sell the vehicles in the same time scale as at the moment.
So there will be more depreciation but there should be a greater contribution so overall in the long run the bottom line should improve (otherwise why implement the policy)?
I suppose in the year of change rather than making a profit on disposal there will be a part of the additional contribution then another part of additional contribution in the following year followed by a smaller profit on disposal. Eg (figures entirely made up) instead of making £5000 profit on disposal in FY 18 there will be say £1500 additional contribution (extra 6 months) then in FY19 another £750 additional contribution (extra 3 moths) then profit on disposal of £2750. So there would be a reduction in profits in FY18 compared to previous years (as there is £1500 more recurrent profit rather than a £5000 profit on disposal) but across the 2 years there will be no difference (-5000 +1500 +750 +2750 =0). In fact there should be an improvement otherwise why implement the policy?
I assume a considerable amount of the profit earned comes because the selling price is greater than the depreciated price;therefore if you hold on to the vans longer for a period you will sell less vans until they have reached the new sale age say 30 months old instead of 2 years.
One point that might be a reason for change is that Vehicles are increasingly better built,more reliable and require less & cheaper service.It is more practical to keep them for a longer period and perhaps you can make a larger proportion of profit from the rental rather than the sale.You also tie up less capital as the average unit price of the vehicles will be lower if you hold them for a longer period.
Sorry, last post came out wrong. Management is suggesting £56m profit maximum = maybe 43p EPS, hence me saying 40p maximum. The management suggestion is before further downward adjustments, so 40p may be an overestimate.
Whichever way I look at this, the profit is going down. And Im not sure that this is a one off movement. It sounds pretty permanent to me. The residuals and the rental margins have been going south in the UK.
However, if 40p is the outlook, the shares are undoubtedly cheap.
I think that the profits warning was weighed down by far too many words.
This business has always been impacted by a) declining vehicle sale profits and b) declining rental margins. The profit warning is basically saying that both of these are happening now and that a new strategy is called for to arrest the decline. The rest is just obfuscation tagged onto the warning.
Rental businesses are always prone to falling off a cliff if residuals decline, or if margins are squeezed.
So we are now looking at future EPS of maybe 40p.
Someone has quite sensibly said that hanging onto the vehicles for longer will make the company more money (or more likely reduce the rate of decline in profitability). But this will take a while to have a positive effect, other than maybe by improving depreciation charges. Even the latter is uncertain because an older vehicle will have a lower residual value, and competitors may offer similar rates for shorter term rentals.
In summary, this is a lowish quality business with low barriers to entry. It could be a target for a takeover by a van manufacturer (or could equally be undercut by them). I take some heart from an activist investor being involved.
A cheap Hold, but only just. Needs a recovery in the UK (abandon Brexit?!).
I think the reason sf that they sell the vans at a profit after booking three years depreciation, now they are keeping them for four years a lot less vans will be sold and hence less sales profit booked. They still have the vans and presumably will sell them at a bigger profit next year!
I absolutely agree that the shares should be good value backed by a 5% yield (divi also reassured by the statement) and NAV which is similar to the share price.
I noted previously some tinkering with the depreciation policy which, of course, is an easy way to manipulate profits in the short term. There have been, as you point out staff changes and let us hope that it really is a one off recognition of a mistake. All I would add is that, if it is and if they had only explained it more clearly and directly, it would have gone down a lot better with....... well, me for one!
I hear what you are saying.
The main issue is a better shareholder return. It looks like they have been selling the vehicles off too early which means they get a better price but then just have to replace the vehicals new in the fleet.
This way they get more out of the vehicles. As you allude to - this seems to have helped the accounting return but was not what generated best actual value. Any change like this always has an effect on the accounting results and, tbh, would prefer that it is actually recognised than not.
Why it has taken this long to suss this out, I don't know. I suspect that in getting to the bottom of the underperformance in the UK, this kind of thing comes out. They did make some senior personnel changes during last year as I recall.
Will have to read the presentation transcript but am re-assured but the progressive dividend policy.
Not the best email I have received at 7am, mind you.
..but surely that would mean a lower rate of monthly depreciation not a higher one.
They are saying that a longer holding period produces a better return, which MUST mean that actual monthly depreciation is less.
If they do have a one off depreciation write off (given that keeping these same vehicles longer gives a lower depreciation rate) that must mean that they simply failed to depreciate adequately at all. Their new policy statement appears like an attempt to cover that up.
That is my take. If they are going to hold them for longer, they will have to keep depreciating these vehicles for the increased holding period.
By doing the write-off, you take that effect into one year.
In some ways it gives them the right incentive to do the correct thing - ie protect shareholder value.
The good news is that they must have a LOT of confidence in the Spanish business, hence the impending investor trip (assuming it is not just a jolly on the Costas or Madrid).
The bad news is that the UK is slowing down, which is not just an issue for Northgate but also implies something about the current UK economy.
...but if they are changing policy towards keeping their vehicles longer in order to improve returns, why would that involve a one off depreciation hit?
The statement focused on making more profit per unit on disposal by keeping vehicles longer, but that does not imply the need for an increased depreciation due to that policy , if anything the contrary....
I have read the statement and it is possible to take a positive view. However, what I do not understand is why their new policy of extending vehicle holding periods would create a large "one off" hit. I understand why fewer disposal might affect ongoing profits a touch (before the fewer but more profitable disposals start to kick in), but I can see no obvious explanation for a one off adjustment. As far as I can see, the statement dos not make the reason clear.
I hope I am wrong but it sounds a little like a profit hit dressed up as an accounting change. Does anyone have more information? perhaps from the 8am briefing?
Northgate could be a very cheap share. On the other hand the business model which has served it well in the past may have run its course. Most of its vehicles have diesel engines. Structural changes seem to be taking place in the van leasing market. Yet it has a big market share in Spain and the north of England. It is massively exposed to residual values for ex-lease vans. However it is protected to some extent by its ownership of Van Monster which is advertising heavily on Talksport radio at the moment.
The shares are at an attractive entry point and there is decent two-way business at the moment. I can understand why people are selling but on the other hand the shares might be cheap at this level. Surely one of the big vehicle manufacturers like Fiat, Renault or Citroen might be interested given NTG's big position in the market. I've bought a few at under 410p. Maybe the business model is broken. I don't know but it might just be a good buying opportunity.
"Northgate (LSE:NTG)Few things are more frustrating than evenings, sitting in the garden surrounded by mountains, watching a bunch of sailing boats pretending to race on a flat calm sea, while sipping alcohol-free cider and realising nothing ..."
" NORTHGATE PLC (LSE:NTG)Â Few things are more frustrating than evenings, sitting in the garden surrounded by mountains, watching a bunch of sailing boats pretending to race on a flat calm sea, while sipping alcohol free cider and realising ..."
Maybe the market just feels they are a bit ahead of events generally, but there is no news out there to trigger a 5% fall, and no obvious signal. There were two RNS announcements within the last month disclosing holdings moving above 5%, so someone is confident! I am up a nice 60% since buying in last Feb so I am happy to hold and might buy more if this slips back below 500p
"Northgate has released a very brief AGM trading update this morning, confirming that the Group continues to trade in line with expectations and to make progress towards its strategic objectives. Recent periods have been characterised by robust (almost straight line) recovery in Spain offsetting a lack of momentum in the UK business. The UK branch roll out of a few years ago has stalled for now, while plans have been put in place to stimulate UK utilisation and margins under a strengthened sales team. The shares are inexpensive (9x P/E, <4x EV/EBITDA, 4% yield) but the key to a re-rating, in our view, will be delivering tangible signs that these UK initiatives are beginning to bear fruit in the second half of the year."
<b>Northgate plc 45.8% Potential Upside Indicated by Citigroup
Posted by: Katherine Hargreaves 22nd April 2016</b>
Northgate plc with EPIC/TICKER LON:NTG has had its stock rating noted as Initiates/Starts with the recommendation being set at BUY this morning by analysts at Citigroup. Northgate plc are listed in the Industrials sector within UK Main Market. Citigroup have set their target price at 600 GBX on its stock. This is indicating the analyst believes there is a potential upside of 45.8% from todays opening price of 411.6 GBX. Over the last 30 and 90 trading days the company share price has increased 10.8 points and increased 63.3 points respectively.
Northgate plc LON:NTG has a 50 day moving average of 395.66 GBX and the 200 Day Moving Average price is recorded at 429.24 GBX. The 52 week high share price is 664 GBX while the 52 week low for the stock is 316.3 GBX. There are currently 133,232,517 shares in issue with the average daily volume traded being 413,661. Market capitalisation for LON:NTG is £550,783,217 GBP.
Could it be an over reaction to the fear of diesel valuations? Talk of diesels being on their way out? However, even if that were true, it is a far off goal, and the existing diesels are the only option for people to carry out their work in the meantime, so used valuations are holding up and subject to normal cyclical movements will continue to do so.
I sold plenty when the shares had had a great run and seemed to have become expensive, however, I bought a few more myself this morning!
Investors will be relieved to learn that Northgates Spanish operation, the source of much grief in recent years, is now earning the sort of returns that will not lead to the board being put under any more pressure to sell the business.
The van hire company has benefited from the unexpectedly fast revival of the Spanish economy, with something similar happening at its operation in Ireland. This has allowed it to gain a share of the market serving SMEs, while moving away from block contracts with national companies.
The last business is less profitable, while it also means more wear and tear on vehicles, which reduces their resale value. Something similar is happening, in a more limited way, in the UK.
Spain is now generating returns on investment, the best measure of performance for such businesses, of almost 13 per cent, not much behind the UK. Figures for the year to the end of April are distorted by changes to depreciation, underlying profits up by 41 per cent to £85 million.
Northgate shares, perversely, fell by 43½p to 575p. They sell on 12 times this years earnings, which does not look expensive in the longer term given its strong market position.
My advice Buy long term
Why Multiple looks attractive given strong market position
Am I missing something, result update looks but huge drop in sp (even before results came out)?
"Northgate, the UK and Spain's leading specialist in light commercial vehicle hire, has announced that for the year ended 30 April 2015 there was an increase in underlying profit before tax to £85.0m (2014 - £60.3m).
Profit before tax rose to £83.0m (2014 - £51.2m).
There was a 45% increase in dividend per share to 14.5p (2014 - 10.0p)."
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