We believe now is an interesting time to invest in Northgate, with a new executive board and a capable management team in place who have already delivered progress on an ongoing turnaround as we await a full strategic review. The group now has a clear and well communicated capital allocation strategy in place and improved earnings quality, in our view. We believe that the growth opportunity in the UK, the value of the Spanish business and the progress made to date with the turnaround are not being reflected in the share price, which is currently 15.9% below book value (414p per share in FY19A rising to 468p in FY22E). We use a variety of valuation methods including P/B, SOTP, DDM and DCF modelling and arrive at an average implied share price of 450p, 29.0% above the current share price.
- Investment case summary: Northgate is a clear market leader in its markets of UK & Ireland (c.25% share) and Spain (>40% share), enabling it to achieve strong margins and good returns across the group. The management team now have a clear and backable strategy to deliver growth in earnings across the group centred around defending the strong Spanish position while optimising and growing the UK business through investment in core systems and operational efficiencies. Management remain committed to a progressive dividend, paying a yield of 5.4% in 2020E based on our forecasts.
- Growth strategy: The group’s growth strategy is built around four key pillars being defend and grow share in flexible hire, selectively gain share in minimum term hire, broaden the provision of ‘capital light’ fleet solutions and optimise and increase participation in the disposals market. The group is well positioned in both the UK and Spain to execute this strategy, deliver uplifts in earnings and improve returns metrics from here.
- Forecast assumptions vs. consensus: Our forecasts sit 5-7% below current consensus. We take a more conservative view of UK volumes, and competitive pressure in Spain. On our conservative forecasts the group’s growth dynamics remain attractive, in our view. We expect adj. PBT in 2020E of £59.0m (vs £61.8 company consensus) going to £61.9m in 2021E (vs £65.4m). Net debt based on our assumptions in 2020E is £481.4m which is 1.8x FY20E EBITDA.
- Valuation: The shares are currently 15.9% below book value, which is unwarranted in our view. Based on our assumptions the shares trade on an EV/EBIT of 12.8x and a P/E of 9.8x in 2020E. We estimate the intrinsic value of the group to be 450p per share, based on our DCF, DDM, peer analysis and P/B multiple of 1.25x, which would imply a P/E of 12.7x and EV/EBIT of 14.6x on what we believe to be conservative FY20E estimates.
