White van stock to make comeback

All-in bet on the economy

NTG2010ann It must be an omen. I saw my first Northgate (NTG) van on Friday, as I drafted this blog. It delivered us an Arsenal shirt from Sports Direct. Their absence from our roads before, can be explained by the fact that until last month the company operated in the UK as twenty competing commercial vehicle hire firms. Now its one happy brand.

Perhaps Northgate's appearance on my drive portends important changes, and perhaps it demonstrates there are still hires to be made after the property meltdown. Northgate operates just over 60,000 commercial vehicles in the UK and just under 50,000 in Spain, many of them hired to firms working in the construction industry (60% of its business in Spain).

1009NTGeqAss It seems company directors get carried away during boom times just like investors in bull markets. Northgate bought vans like they were tech stocks in 2000, during the Spanish and UK property bubbles. Its Spanish fleet expanded 34% between 2006 and 2008, and its UK fleet grew 9%, financed largely by debt. When the property market collapsed it had loads of vans but fewer customers to hire to, or sell to. With profits falling, Northgate risked breaking the conditions it had agreed with its lenders, so it went to shareholders, raising £77m to pay off some of the debt. It has refinanced the rest until September 2012.

The situation in Spain, or the Costa del Crash, as the Daily Telegraph prefers to call it, seems even more dire than here, although Northgate says its Spanish arm is more efficient. Combining its two Spanish companies (which are merging soon) into one head office in Madrid caused administrative chaos that ended the Northgate careers of both the Spanish chief executive and the finance director, and compounded the financial pain as customers went bankrupt.

Contreras They're not the only casualties. The chairman, chief executive, deputy chief executive, and the company's founder have all gone in the last year. Northgate is now run by two Bobs, Bob Mackenzie, chairman since February, and Bob Contreras, chief executive since June. Contreras had been Northgate's finance director since June 2008, and, having played an important role in its refinancing, I hope his experience was salutary.

1009NTGeps That huge dip in basic earnings per share (blue line), and the corresponding dip in financial strength (yellow line, above) is what mammoth write offs look like. The company wrote about £90m off the value of its car fleet, and about £90m off the value of its businesses in 2009. Total write-offs exceeded £200m, the price of excess in the boom years. The company’s remaining book value is only just over £300m.

I think Contreras is more conservative. Northgate's shrinking its fleet as quickly as it grew it. In Spain it owns about as many vehicles as it did in 2006, while in the UK it owns 10% fewer, and it's still shedding vans. In February 2009 it adopted a plan to increase efficiency, decrease costs, and raise prices. Judging by it's F_Score of seven out of nine, it's succeeding. According to the figures in its annual report, the company was less indebted and more profitable in 2010, than it was in 2009.

Because its disposed of so many vehicles, its using the existing ones more efficiently and utilisation rates are at or exceeding the 90% mark it targets from 83% in Spain last year and 88% in UK. It’s also raised the rates it charges a little in the UK, but in Spain they’re still falling, and Northgate’s relying on a smaller network of larger depots with fewer staff.

The company looks like its regaining some strength, and it looks cheap too. The shares cost just two times average earnings over the last ten years, and although they've recovered slightly, they're still well under 10% of their peak price.

1009NTGpriceNorthgate may even be competitive, implying in its report that its competitors have more limited access to finance. I’m not sure how cavalier Northgate can, let alone should, be though. Although it can borrow more under its existing arrangements, they run out in two years time.

I like Northgate’s new-found sobriety. The Mission Statement is:

We always put our customers first, providing tailored vehicle solutions which match the needs of each individual business and offer only the leading manufacturers’ products in each weight category – from a single van to a fleet of thousands.

Although it's easy to pooh pooh mission statements, it's surprising how many companies put profit first, and if you've read John Kay's book, Obliquity, you'll know that can be a big mistake, even for shareholders.

There are risks, of course, Northgate is still heavily indebted. It owes about 45% of total assets. It's also in the transport sector, which is not in itself a problem, but The Thrifty 30 already contains Castings, which makes parts for vehicles, Ricardo, which designs parts for vehicles, Autologic, which transports the vehicles around, Dart, which uses them to carry people and produce, and Armour, which among other gizmos, makes car stereos.

It’s also in construction: Alumasc and Titon, which make building products, T Clarke and Waterman, which are contractors, and Dewhurst, which makes lift components. Adding Northgate would mean half of the companies in the portfolio are dependent on two industries that are highly sensitive to the level of economic activity.

If that's where the value is, that's where I'd want the money. On the other hand, if I'm wrong, the portfolio is poised nicely for Armageddon.

I've added Northgate at 212.06p

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Thrifty 30 updates

The current Thrifty 30 portfolio

Educational supplier RM says Summer is its busiest period and this summer it “commissioned more new schools, processed more examination scripts, and shipped more classroom resources than ever before.”

Andrew Magson, finance director of Alumasc buys a modest amount of shares.

Hooray! Fashion retailer French Connection makes a tiny profit in the first half of its financial year.

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